A critical factor is people's confidence," said Martin Anderson, a senior fellow at the Hoover Institution and a former presidential adviser. "You can't measure that, you can't put it into an econometric model. What's undermining confidence is they think the federal government can't attack this problem of deficits.
"The problem today is the deficit and the deficit is caused by too much spending," Anderson said. If the constitutional requirement to balance the budget were made effective gradually, "People would begin to act on certainty that inflation is brought under control" and interest rates would fall.
"You have to impose an overall control that overwhelms the power of special interests," Anderson said. Monetary Policy
"You ease monetary policy sufficiently to lower interest rates sufficiently to get the economy back on track," said William Nordhaus, an economics professor at Yale University.
"The option of doing nothing is not unreasonable" if it is unclear whether economic activity will pick up in the next six weeks to two months, said Alan Greenspan, former chairman of the Council of Economic Advisers. However, "If the economy does not pick up in six weeks to two months , the only real policy option is on the Fed side," he said.
"The main option is monetary," said Alice Rivlin, director of economic studies programs at the Brookings Institution. "If you increase the money supply, there is a risk of inflation in the future. But I'm willing to take this risk to get interest rates and the dollar down."
"The only medicine we know is to run a loose, slack economy," said Charles Schultze, former chairman of the Council of Economic Advisers. In the short run, "It's difficult to interpret where we're going and how we're going to get there. "Reducing the Deficit
Economist Andrew Brimmer said the deficit should be reduced by increasing taxes, because Congress and the Reagan administration are not serious about spending cuts. Deficit reduction is the only way to reduce interest rates in the long run and keep the expansion going, he said. "Mr. Reagan will have to increase some taxes. No one has the guts to raise individual rates, so they'll probably do it through tax reform."
"I don't see the need for the Fed to adopt an easy money policy because of the potential inflation," Brimmer said. Tax Cuts
"Fiscal stimulus is out," Rivlin said.
"The deficit we have now of $200 billion a year is caused primarily by a reduction in tax rates, not a burst of expenditures," Brimmer said.
Because of the size of the federal budget deficit," It's hard to see how one could push for a fiscal stimulus now," said David Munro, an economist with General Motors Corp.