NABE Policy Survey: Long-Term Fiscal Deficits Should Be Addressed

The NABE August 2013 Economic Policy Survey presents the responses received from a panel of 220 members of the National Association for Business Economics. Conducted semiannually, this survey was taken between July 18 and August 5, 2013. Portions of this survey may be reprinted in whole or in part with credit given to NABE. View the survey results, including complete tabulations, online at www.nabe.com. This is one of three surveys conducted by NABE. The other two are the NABE Outlook Survey and the NABE Industry Survey. Jay Bryson (Wells Fargo Securities), Chair; Charles Kennington (Virginia Department of Taxation); and Emily Kolinski Morris (Ford Motor Company) conducted the analysis for this report.

Executive Summary

“An overwhelming majority of the NABE Economic Policy Survey panel believes that the projected deficits over the next few decades represent a principal challenge facing the nation, although there was no consensus among panelists who participate in the NABE Policy Survey regarding the appropriateness of fiscal policy at present,” said NABE Policy Survey Committee Chair Jay Bryson, Global Economist at Wells Fargo Securities. “Most panelists favor a mix of policy approaches that includes some form of spending restraint as the best way to address long-term deficits, with a plurality favoring a mixed approach of spending restraint and revenue increases.

“There continues to be greater consensus regarding the appropriateness of monetary policy, with a majority of the NABE panelists indicating that current monetary policy is ‘about right.’ About half of the panelists believe that the Federal Reserve will begin to wind down its asset purchase program by the end of the year, while the vast majority looks for the Fed to maintain its current target for the fed funds rate through the first half of 2014. There is significant support for the appropriateness of the Fed’s 2 1⁄2 percent inflation threshold, although there is no clear consensus about the appropriateness of the Fed’s 6 1⁄2 percent unemployment threshold. Most panelists anticipate that inflation will be near the Fed’s 2 percent inflation target in five years.

“A majority of respondents thinks that a path to citizenship or other legal status for undocumented workers currently living in the United States will result in stronger long-term economic growth. A majority also replied that implementation of the Patient Protection and Affordable Care Act will increase healthcare expenditures in the federal budget relative to previous law. Almost half of the respondents thinks that the Bank of Japan will succeed in its efforts to raise the Japanese inflation rate to 2 percent.”

Fiscal Policy

Consistent with the findings of the March 2013 NABE Policy Survey, there was no consensus on the appropriateness of current fiscal policy among NABE survey panelists. Roughly 40 percent of respondents describe current fiscal policy as “too restrictive,” while more than 30 percent describe it as “about right” and 21 percent consider it “too stimulative.” Looking ahead, however, there was greater consensus concerning projections of fiscal deficits. An overwhelming majority of panelists (80 percent) replied that either the projected deficits over the next 10 years or the projected deficits in the following two decades are the principal challenge facing the nation (Figure 1). In contrast, only small shares of the panel indicated that either the country does not have a fiscal challenge (6 percent) or that the present deficit is the primary fiscal challenge facing the country (12 percent).

Figure 1: The Principal Fiscal Challenge Facing the Nation

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The survey asked panelists three questions about the current fiscal deficit. (Note: As indicated above, most do not believe it is the primary fiscal challenge facing the nation.) Opinions on the primary cause of the current fiscal deficit were mixed. Excessive spending was cited by 42 percent of survey participants as the primary cause, edging out the lingering effects of the recent severe recession (cited by 37 percent of panelists). Only 18 percent of the panelists indicated that the current fiscal deficit is primarily the result of insufficient revenues. The vast majority of respondents believes that structural elements are contributing to the current fiscal deficit; 43 percent of respondents indicated that the deficit is “mostly” structural in nature while another 42 percent suggested that cyclical and structural elements are “evenly balanced.” Only 13 percent said the deficit is “mostly cyclical.”

When asked, ”What is the best way to address the current budget imbalance?” a small plurality (34 percent) responded that the best approach would be policies “to stimulate economic growth.” About a third (32 percent) favors a combination of reduced spending and increased revenues. Almost 20 percent of survey respondents indicated a preference for implementing spending cuts as the primary deficit reduction measure while 11 percent recommended no policy changes at present as they believe the present deficit is either not material or is not the primary economic challenge facing the nation.

More panelists believe projected deficits in the next two decades are more threatening to economic growth than the current deficit, and a plurality (39 percent) believes that a mix of spending restraint and increased revenues would be the best approach to address these deficits (see Figure 2). This policy approach was more popular among panelists than a policy that focuses primarily on spending restraint (cited by 32 percent of panelists) or one that focuses primarily on increased revenues (cited by only 2 percent).

Figure 2: Best Way to Address Rise in Deficit-to-GDP Ratio in 2020s and 2030s

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In terms of long-term spending restraint, a significant plurality of the NABE Policy Survey panel (43 percent) replied that the federal government should target mostly federal healthcare spending (i.e., Medicare and Medicaid). At the same time, there was also some support for cutting other programs, with 19 percent indicating that defense spending should bear the brunt of the cuts and 18 percent suggesting that other federal entitlements (e.g., military and federal employee pensions, farm subsidies) should mostly be targeted. Similarly, the survey asked panelists their opinions on the best potential sources for new revenues. The results indicate that the majority of panelists—42 percent—prefer broadening the individual and corporate tax bases rather than using other measures. Small but significant shares of the panel prefer a broad-based energy or carbon tax (cited by 15 percent of panelists) or a national sales or value-added tax (cited by 12 percent) as effective alternatives if the federal government chooses to increase revenues.

More than two-thirds (68 percent) of respondents say fiscal policy uncertainty is holding back the economy now. Nevertheless, this percentage is down 11 points from the March 2013 survey.

Monetary Policy

In contrast to the panelists’ widely divergent views on current fiscal policy, a majority (57 percent) of respondents considers current monetary policy to be “about right.” Panelists’ views have not changed significantly over the past six months; in March 2013, 53 percent indicated that monetary policy was “about right.” In addition, an overwhelming majority of the panel (73 percent) continues to believe that quantitative easing has been “a success,” but a plurality (nearly 40 percent) believes that the Federal Reserve will begin to wind down its asset purchase program during the fourth quarter of 2013 (see Figure 3). Only 10 percent of the panelists look for the Fed to begin to “taper” its asset purchases during the third quarter of 2013. Only one-quarter of the panelists thinks that the Federal Open Market Committee will begin to raise its target for the fed funds rate prior to the second half of 2014. One-third picked the second half of 2014 and 39 percent chose “2015 or later.”

Figure 3: When Do You Think the Federal Reserve Will...

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The Federal Reserve has stated explicitly that it “anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6 1⁄2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.” There was no clear consensus among the panelists about the appropriateness of the 6 1⁄2 percent unemployment “threshold.” While one-third of the respondents thinks that the threshold should be maintained, another one-third thinks that it should be broadened or replaced with other measures of labor market conditions. Fifteen percent believe that the unemployment threshold should be eliminated. However, there was greater consensus regarding the 2 1⁄2 percent inflation threshold, as nearly 70 percent of the panelists think that the threshold should be maintained. Most panelists (60 percent) anticipate that PCE inflation will be near the Fed’s 2 percent objective in five years, although one-third expects that inflation will be “significantly above” this objective in five years. This distribution was very similar to the responses in the March 2013 survey.

Regulatory Policy

The August 2013 NABE Policy Survey included several new questions regarding recent developments in immigration and healthcare reform. The survey asked participants about the effect on long-term economic growth of a path to citizenship or other legal status for undocumented workers currently living in the United States. A majority of respondents (62 percent) thinks such a policy would increase the long-term economic growth rate, while 32 percent think such a policy will have a limited impact on growth and 4 percent said it would reduce growth. More than 40 percent of respondents expect a path to citizenship will reduce budget deficits in the long term, suggesting that the incremental cost of social programs under such a policy would be more than offset by higher than expected economic growth rates. A similar percentage suggests reform would have a limited effect on the deficit. Only 15 percent of the panelists expect immigration reform to increase the federal budget deficit in the long term.

The survey also included two questions about the Patient Protection and Affordable Care Act (PPACA). A majority (about 60 percent) of the panelists expects that implementation of PPACA (Figure 4) will increase healthcare expenditures in the federal budget relative to previous law. Roughly 20 percent of respondents believe that PPACA will reduce healthcare expenditures, while just 4 percent suggest it will have no effect.

The survey also asked the NABE Policy Survey panel about the potential effect on 2014 economic growth of the delay in the implementation of employer coverage mandates from 2014 to 2015. More than 60 percent of panelists think that this delay will have no effect on real GDP growth in 2014 relative to previous forecasts. About 15 percent think that such a delay will produce higher economic growth and an equal share suggests it will produce reduced growth in 2014.

Figure 4: Effect of PPACA on Federal Healthcare Expenditures Over Time

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Foreign Economic Policy

The survey asked panelists two questions on Japanese economic policy: (1) Will the Bank of Japan succeed in raising the country’s CPI inflation to 2 percent? and (2) What will be the impact of a weaker yen on U.S. economic growth? Almost half (45 percent) of the respondents expressed some confidence that the Bank of Japan (BoJ) will succeed in its efforts to raise CPI inflation to 2 percent. Still, roughly one-quarter thinks that the BoJ will not succeed. The remaining one-quarter of respondents did not offer a view on the question. About 40 percent of survey participants think that the depreciation of the Japanese currency will hurt U.S. growth through reduced export competitiveness. However, 30 percent think it will have no effect and 15 percent suggest that the resulting growth in the Japanese economy will boost U.S. exports and GDP growth.

Policy Survey Committee

Jay Bryson, Managing Director and Global Economist, Wells Fargo Securities (Chair)
Jim Glassman, Managing Director and Senior Economist, JP Morgan Chase
Constance Hunter, Chief Economist - Alternative Investments, KPMG LLP
Charles Kennington, Economist, Virginia Department of Taxation
Emily Kolinski Morris, Senior Economist, Ford Motor Company
Lynn Reaser, Chief Economist, Point Loma Nazarene University

Policy Survey August 2013

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Questionnaire