Congress Should Heed New Fed Chair’s Warnings on Fiscal Policy

Blog Post
Monday, March 05, 2018

In his first appearances on Capitol Hill as the new Federal Reserve chairman, Jerome Powell strongly urged lawmakers to start putting the federal government on a better fiscal path.

Powell, who became Fed chairman in early February, told the House Financial Services Committee in response to lawmakers’ questions last week: “We really need to get on a sustainable fiscal path and the time to really be doing that is now.”

Powell’s remarks are particularly welcome given the recent legislation that unfortunately relies on substantial new government borrowing to cut taxes and increase spending. He also testified last week before the Senate’s Committee on Banking, Housing and Urban Affairs.

Powell’s two immediate predecessors -- Janet Yellen and Ben Bernanke -- periodically offered similar reminders to Congress of the need for fiscal reforms as the U.S. economy strengthened following the Great Recession.

In his prepared testimony last week, Powell offered an upbeat view of the economy, noting “solid growth” and a strong labor market.

This economic strength supports Powell’s suggestion that Congress should act now on fiscal reform; deficits may be necessary to stimulate the economy in a recession, but the government should take advantage of good economic times such as we are now experiencing to reduce federal borrowing and hold down the national debt.

Unfortunately, Congress and President Trump have headed in the opposite direction in recent months.

Powell also reminded lawmakers of the “significant fiscal issues” facing the country as more of the Baby Boom generation retires. This means more older Americans will pay lower taxes while receiving more government support through Social Security and Medicare.

Powell also said that when elected officials make fiscal policy changes, they should do so in ways that enhance the economy’s productive capacity. For example, he said Congress should focus on ways to “create incentives for more skills and aptitudes among our labor force and greater investment in R&D (research and development).”

The new Fed chairman is offering some good fiscal advice to elected officials. They would do well to keep it in mind as they continue to work on budget plans for the current year and beyond.