Thursday, January 21, 2010

Volcker Steps to the Fore

The Washington Post has an article this evening highlighting the increasing influence of Paul Volcker, former Fed Chairman, on the Obama Administration's economic policy.
Senior administration officials say there is now broad consensus within the
White House and the Treasury for the plan advanced by Volcker, who leads an
outside economic advisory group for the president....Volcker had been arguing
that banks, which are sheltered by the government because lending is important
to the economy, should be prevented from taking advantage of that safety net to
make speculative investments....

Much of today's announcement by The President and Volcker focused on potential new regulations on commercial bank activities. But what is Volcker's view on fiscal policy?
This is from an interview Volcker did in December with a German magazine, that was found referenced at another blog:

SPIEGEL: To get the recovery to the point where it is right now has cost a lot
of money. National debt will probably reach $12 trillion in 2019. Just serving
the debt costs $17 billion a year — at least according to this year’s forecast.
That’s difficult to sustain.
Volcker: You’ve got to deal with the deficit and
you’ve got to deal with it in a timely way. Right now, with the unemployment
rate still very high, excess capacity is still evident, and the economy is
dependent on government money as we said. We are not going to successfully
attack the deficit right now but we have got to prepare for attacking
SPIEGEL: Should Americans prepare themselves for a tax
Volcker: Not at the moment, but I think we would have to think
about it. The present tax system historically has transferred about 18 to 19
percent of the GNP to the government. And we are going to come out of all this
with an expenditure relationship to GNP very substantially above that. We either
have to cut expenditures and that means reducing entitlements and certainly
defense expenditures by an amount that may not be possible. If you can do it,
fine. If we can’t do it, then we have to think about taxes.

So this looks like Volcker is apparently not in support of a radical departure from the immediate fiscal policy, but as Mike has recently posted here, current fiscal policy is not robust; maybe the best you can say is that Volcker is not advocating making it worse.


mike norman said...

Yes, Volker has fretted publicly, and often, about the Chinese "lending us money" and how that might not continue much longer and if it stops then we'd be in big trouble. He's still thinks we're on a gold standard, apparently. Even though he acknowledges that it would be bad to take steps to reduce the deficit now, amid high excess capacity and high unemployment, this view is not held by the general public and most lawmakers (certainly Republicans, who have gained a new victory), who believe that cutting the deficit is a priority that is second only to national security.

Ryan Harris said...

When China stops lending to the USA and they start spending their trade dollars instead of squirreling them away, we would export more. And there would be more people working which would produce more tax revenue. And less need to borrow. Yes, Mr. Volker, that would be a very bad thing indeed, if China stopped lending money to the treasury.