The Arrhythmia of Federal Finances

Blog Post
Wednesday, September 22, 2021

This week on Facing the Future, Tori Gorman and I discussed balance sheets, risk, and the “arrhythmia of finance'' with Peter Fisher, Senior Fellow at the Center for Business, Government & Society at the Tuck School of Business at Dartmouth, where he also serves as a Clinical Professor. Our discussion encompassed the long-term budget outlook, debt limit dysfunction, and the challenges of monetary policy in the post-pandemic environment. 

Fisher’s insight into these topics is informed by his experience as Under Secretary of the U.S. Treasury for Domestic Finance (2001-2003) and his many years at the Federal Reserve (1985-2001) where he concluded his service as an executive vice president and Manager of the Federal Reserve System Open Market Account. He did not paint a rosy scenario. 

Regarding long-term obligations, he compared the federal government to “an insurance company that does its accounting on a cash basis, accruing income and expenses just as things go in and out the door. And an insurance company which does its accounting on a cash basis is not really an insurance company at all. It is an accident waiting to happen.”

“As we know now from the recent Social Security Trustees’ Report,” he continued, “the chickens are going to come home to roost on cash accounting for a big insurance company paying for Americans’ retirement. And that’s really how I want people to think about the problem we face with the federal government’s finances.”

Fisher rejected the idea that deficits don’t matter any more because interest rates on the debt are currently very low. He pointed out that our track record on predicting interest rates is not good. “The longer-time horizon really matters,” he said. “Borrowing from ourselves in the future, indefinitely, is kind of an Achilles heel of democracy. We shouldn’t be letting the current generation burden future generations so we can live a little better.”

On monetary policy, Fisher expressed concern that the Federal Reserve has allowed “quantitative easing” to continue past the point of doing any good and that it will be hard to engineer a soft landing.

“It’s always important in a financial crisis, with asset prices falling, for the central bank to liquify the markets and try to avert a continued fall in prices,” he said. “What we have is very little evidence that after the immediate shock of a crisis and the stabilization that simply pumping-up the quantity of money and having the Fed buy a lot of assets to drive prices higher will actually have much impact on GDP and stimulate the economy. The evidence isn’t really there.”

In his view, “after three or four months, the Fed should have weaned itself off of quantitative easing, should have stopped buying all these assets, and let markets find prices themselves.”

Another area of concern to Fisher is the stalemate over raising or suspending the debt limit.

He noted that the Constitution “gives Congress all of the levers of fiscal policy -- spending, taxes, and borrowing. Congress decides how much taxes to collect and how much revenue to spend and they delegate to the Treasury borrowing within a limit. And then they say they’re shocked to discover we've run up to the limit.”

“This is how democracies fall apart,” Fisher said, “when the people we elect, and we expect to take it seriously, stop taking it seriously. Congress has got to be serious.”

Hear more on Facing the Future. I host the program each week on WKXL, NHTalkRadio.com (N.H.), and it is also available via podcast. Join me and my guests as we discuss issues relating to national fiscal policy with budget experts, industry leaders, and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.