Q: and A:
Alicia Munnell was a controversial pick when she was nominated by President Clinton to serve as assistant secretary for economic policy at the Treasury Department.
Republicans bad criticized her for a research paper in which she discussed the idea of a one-time tax of 15% on pensions to boost federal revenues. And in other research, she concluded that increased public outlays for roads and other infrastructure programs could help the economy by boosting productivity.
The idea elicited debate among economists, but also caught the fancy of a new administration interested in finding innovative ways to build investment partnerships between private and public groups.
Munnell, 50, was senior vice president and director of research at the Federal Reserve Bank of Boston for nine years before coming to Washington. She is widely published in a variety of academic and professional journals, and has a doctorate in economics from Harvard University.
In an interview with senior reporter Stephen A. Davies, Munnell talks about her new policy-making job and compares it to her 20 years of experience at the Boston Federal Reserve.
Q: You have done research on the link between increased investment in infrastructure and productivity growth. Is there a cause and effect relationship?
A: My work has shown that when looking across states, those states that have higher levels of public capital, holding private capital, and employment capital constant, have higher levels of output. So there is definitely an association between higher public capital and higher outlays and productivity. I am absolutely convinced of that.
Q: Can it he argued that some of these states have higher output and higher public capital just because they are wealthier states?
A: The statistical analysis tries to correct for the fact that some states have more private capital than others.
Q: Do you think public spending on infrastructure has been neglected? And if so, at what levels of government?
A: There has been a marked decline in our level of public capital investment. Some people have alleged that this merely reflects the completion of the interstate highway system. We had a big spurt of hospital construction in the '60s. The baby boom had to come through schools. I actually think the decline reflects more than that. It reflects a real cutback in spending on public infrastructure, and you see it in federal grants to states, you see it in the money states spend on their own infrastructure. I think a lot of it can be attributed to real fiscal constraints at the state and federal levels.
Q: Do you see ways the federal government can contribute to public investment either directly or indirectly?
A: Right now the federal government spends a lot of money on grants to state and local governments. I think it's worth our reviewing and making sure those grants are made in the most effective way and that we encourage pricing of scarce public capital whenever possible.
Q: What do you mean by pricing of scarce public capital?
A: Before you build another airport, you ought to make sure that you're rationing the number of landing spaces in an appropriate way. So if you're going to build because you have everybody jammed up at four or five o'clock in the afternoon because a lot of small planes are arriving at the same time the Delta shuttle is flying in, then you might be able to solve some of that problem by making the small planes pay a high landing fee. You want to make sure that you're using existing public capital efficiently before you go and build more. And then, to the extent that the endeavor is one that requires government support, you [must] use the right amount of federal grant money to induce some private-sector activity.
Q: Treasury tax policy officials have told Congress they do not support changes in private-activity bond curbs. How does this mesh with the President's campaign promises to support more private and public ventures in infrastructure financing?
A: The administration is just beginning to look into the issue of public infrastructure financing. There have been a lot of proposals made by a series of commissions on how you should use public pension funds or private pension funds or municipal bond subsidies or direct grants, and I think we're just beginning to investigate the options thoroughly.
Q: How do you see your responsibilities in this office, and are you planning any fresh initiatives that will distinguish this administration's Treasury Department?
A: This office currently is extremely involved in the interagency process. I personally am very active on the welfare reform task force. We have a deputy assistant secretary who is very involved on the health care [task force]. We are on a wide range of task forces ranging from greenhouse gases to Superfund, to employment training for dislocated workers.
Q: So you have a pretty broad mandate in terms of economic analysis.
A: My portfolio is actually quite narrow in the sense that the key responsibilities here are economic forecasting both within this building and as part of the troika [the administration's forecasting unit of the Treasury, Office of Management and Budget, and the President's Council of Economic Advisers]. And the secretary of the Treasury is managing trustee of the Social Security trust fund, so some responsibilities come with that. Otherwise, the job is to do with as you want, and there are just unlimited opportunities to help out other departments within Treasury, and within the administration more broadly.
Q: Do you have any comments about your own experience coming from the Federal Reserve to your current job?
A: The pace is dramatically different. In the Fed we tend to set up system committees and study things deliberately and carefully for many years. Here, we're faced with decisions daily that have to be made, and there is not the opportunity to give each issue the kind of scrutiny that we get within the Fed. But this is a fast and fun and exciting environment.
On the other hand, the two institutions have something in common in terms of the professionalism of the staff. Both have this sense that they are involved in significant enterprise, and the staff of both are really extraordinary.
Q: The administration's mid-session budget review due out soon will likely include a revised economic forecast estimating gross domestic product growth of 2.5 % this year, down from the original estimate of 3.1%. Do you see that being the case?
A: I don't know. It's going to be less than the 3.1%, and it's probably going to be more than 2%. but I don't know where we're going to come out on that. The key uncertainty is the second quarter. It's driving everybody crazy.
Q: It's going to be better than the first.
A: It's going to be better than the first, but the first was 0.7%, so that's not saying a lot. And you have these two terrible pieces of contradictory information.
Q: Do you, as policy adviser, feel frustrated with the slow pace of the economy? with the slow pace of the economy?
A: In the absence of the stimulus package, we have growth much below what we would want. Our goal is to get unemployment down, and you really need economic growth in excess of 2.5% to have it come down.
Q: What sectors do you expect to propel GDP growth in the months ahead, and what areas will remain soft?
A: I guess we see some pickup in consumer spending. Sales of cars and light trucks have been great, and our preliminary reading on retail sales looks good. Housing should continue to plug along.
Q: What about the soft sides?
A: I don't think we're going to have much investment in structures for a very long time. Many areas still have see-through office buildings and factories.
Q: What about the trade deficit?
A: Foreign countries are weak, and demand is weak for our exports. We hope that is going to bottom out some time next year, and then increased demand and export growth can be a source of strength.
Q: President Clinton said he expects low, interest rates to contribute as much as $100 billion in economic stimulus over the next year. But he said after that we will need other things to propel growth. Are you worried about a slowdown taking hold later next year?
A: I think we're trying to do a complicated thing. We're trying to reduce the deficit and keep the economy growing at a steady pace over the next four or five years. We have seen a drop in long-term interest rates. My expectation is that we're not going to see rapid growth, but the hope is for slow and steady growth above 2.5% so that the unemployment rate steadily comes down.
Q: And that's with some recognition that the budget package in and of itself is a drag on economy growth, isn't it?
A: Deficit reduction is definitely contractionary, there's no two ways about it. But we have seen the decline in long-term rates, which has a stimulative effect by increasing consumption and reducing the cost of capital, which will stimulate investment.
Q: Do you view Fed policy as supportive of the administration's economic policies, or do you feel a slight tightening of monetary policy poses a risk to desirable growth?
A: There's been no tightening of short-term policy since we've undertaken this deficit reduction effort. The Fed has expressed support for this effort, and we've seen a significant drop in long-term rates. Therefore, we enjoy the favorable interest rate environment that we need to get this tough job done. The Fed did rattle its swords, but since then we have seen inflation come down. We've seen continued slack in labor markets. My expectation is inflation is going to remain low for the rest of the year. I don't think raising rates is going to be an issue.
Q: Given the high unemployment rate in the United States and in other industrial countries, do you believe it may be necessary to accept slightly higher inflation to create jobs?
A: As I understand the Fed's view on inflation -- and I endorse this, I think it's a very sensible thing -- they want a level of inflation that does not interfere with decisions. I think at the low rates we have, people can argue whether that level has been achieved or not.
Q: But do you think it might he necessary to accept slightly more inflation for more growth?
A: Everybody wants to have strong long-term growth. That means moderate inflation, because once you have inflation out of control, then the monetary authorities are forced to crack down. So no one wants to let inflation get out of control. But at this point, we are so far from any level that would put pressure on prices that we can easily grow more without having to worry about the trade-off between inflation and monetary policy.