Economists Losing Faith in Fed, Wary of Tax Cut Expiration

It's fun to hear the talking heads on cable debate about Federal Reserve policy and the Bush tax cuts, but wouldn't it be nice to know what actual professional economists really think? The National Association of Business Economists provides precisely that. In its August survey it asks these questions, and show that, while there's no clear view on the best monetary policy, there's some consensus on whether to allow the Bush tax cuts to expire.

Monetary Policy

First, how do the business economists feel about the Federal Reserve's action lately? Good, but not great:

NABE monetary 2010-08 v2.png

While 59% is still a pretty decent approval rating, it's clearly trending downward from the 70% of economists who thought the Fed was doing a good job a year ago. Of course, economists are significantly more cynical about fiscal policy, where only 39% believe lawmakers are taking the right actions.

But the decline in monetary policy confidence isn't due to one reason. The business economists were all over the map on what the right policy should be. They were nearly evenly split between more restrictive, more simulative, and unchanged policy, with 36%, 33%, and 31% respective respondents urging each strategy.

In terms of the price level, deflation concerns dominated with 45% saying it was more of a risk in the near-term than inflation was in the long-term. Another 16% saw outright deflation as the bigger risk, while 15% saw outright inflation a significant danger. The other 24% believed neither risk dominates.

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There was more clarity with fiscal policy, however. Very few business economists believe it's wise to allow all the Bush tax cuts to expire. Here's the breakdown for the individual income tax cuts:

NABE tax 1 2010-08 v2.png

It's striking that a majority actually want the taxes extended across-the-board, while only 14% wanted them all to expire. The remaining third are on board with the Obama administration's strategy, to allow the taxes to expire on all but those it defines as rich.

A similar result was found for dividends and capital gains taxes:

NABE tax 3 2010-08 v4.PNG

NABE tax 2 2010-08 v4.PNG

These results were slightly more drastic, with only around 22% supporting the Obama administration's extension to all but the rich, and more than 60% wanting an across-the-board extension. This indicates that economists must want investment to be very attractive for Americans.

As for the deficit, again there is a pretty wide range of opinions:

NABE deficit 2010-08.png

The VAT is a standout here, but Social Security Privatization is also very popular among these economists. Interestingly, the flat tax has very little support among respondents.

So what does it all mean? There's still a lot of uncertainty out there. There was only weak consensus reached on most of these issues. The clearest area of agreement was that the Bush tax cuts should be extended to at least families earning less than $250,000. But in terms of other monetary and fiscal policy options, these economists' opinions were across the spectrum of options.