VideoEver since N. Gregory Mankiw resigned from the Council of Economic Advisers (CEA) in February, there have been some indications that the U.S. economy is headed for a rocky stretch. First-quarter gross domestic product grew only 3.1 percent — the slowest rate in two years. Congress approved additional funding of $82 billion for the Iraq war. Interest rates have continued to rise.
Mankiw, now back at the Harvard University economics department, argues that no one indicator should be viewed in isolation. "At CEA, we took every piece of data with a grain of salt," says Mankiw, who was charged with analyzing economic indicators and explaining their import to President Bush. "You always need to sit back and take each one in a broader perspective."
In April, for example, the economy added 274,000 new jobs, the dollar demonstrated new strength against the euro, and the trade deficit reported for the prior month surprisingly narrowed to $55 billion. When all indicators are taken together, says Mankiw, "the economy is doing fine."
That optimism is tempered by caveats, most of them political. As chairman of the three-member CEA, the 47-year-old Mankiw advised the President on some of the country's most heated problems — Social Security, tax, and the burgeoning budget deficit. He warns that continuing inertia on these issues — especially entitlement programs — will have dire consequences.
Those concerns are one step removed from his current post, where Mankiw is engaged in revising his two textbooks, Macroeconomics (Worth Publishers) and Principles of Economics (South-Western/Thomson), and preparing to teach introductory economics in the fall. Truth be told, that's fine with him. "Temperamentally, I'm a professor," he says. "And one of the differences between policy jobs and academic jobs is that professors think about whatever they want to think about. In a policy job, you have to think about what needs to be thought about at that moment."
Recently, Mankiw sat down with CFO deputy editor Lori Calabro to discuss the issues that marked his time in Washington, and to offer his own thoughts of the moment.
Does the influence of the CEA vary from Administration to Administration?
I'm sure it does, but it's hard to judge. Most White House decision-making in any Administration is not in public view. When I was there, it worked very efficiently.... Essentially, CEA works as an internal economic think tank for the President.
Did you believe you had more or less influence as your term progressed?
I always felt very good about the process. I thought the right people were in the room to discuss whatever issue was pressing, and that all the options were presented to the President. Ultimately, it's his decision.
Business is being really quiet on the issue of Social Security. Does that concern you?
The business community thinks about issues that have a very direct impact. The job of the CEO, after all, is to maximize shareholder value, not to be a philosopher or king. What Social Security reform does affect, however, is the state of fiscal policy, which in turn will affect future budget deficits, as well as the level of taxation. And the fiscal health of the nation depends on dealing with the aging population.
As an advocate of private accounts, do you see a viable alternative if they're rejected?
There are two issues. First, do we want to make a transition from the current defined-benefit structure to more of a defined-contribution structure? The second issue is how to deal with the fact that the present value of promises greatly exceeds the present value of tax revenues coming in to the Social Security system. Even if we stay with the current defined-benefit structure...the numbers don't add up. So at some point, folks have to come together around such things as raising the retirement age, or more means-testing, or changing the indexation rules, or raising the cap on taxable payroll....
[As for alternatives,] I would like to see an increase in the age of eligibility for benefits. The progressive indexing proposal suggested by [former Fidelity Investments executive] Robert Pozen also has much merit.
If the funding gap is such a problem, why not eliminate enough of the proposed tax cuts to cover it?
This is the standard refrain from the Left: let the rich pay for it. The same answer seems to apply to saving Social Security, saving Medicare, reducing the budget deficit, giving health insurance to the uninsured, and so on. But let's face it: if we are going to have a government do all these things with higher taxes, then we all will end up paying more taxes to finance the larger government.
What do you expect from the President's panel on tax simplification reports?
Tax reform is an issue that can't be avoided, because of the number of people hit by the alternative minimum tax (AMT). Once they start paying it, they're going to say to themselves, "Why am I being taxed two different ways?" [My suggestion] is something along the lines of a consumed-income tax. I'm reticent to use the term consumption tax because people immediately think retail sales tax. What I really mean is an income-tax-like structure that shelters savings more. Imagine a world in which most or all savings gets 401(k)-like treatment. It still looks in some ways like an income tax, but it would really boil down to a tax on what you consumed. That's because anything you don't consume, you can put in a vehicle that wouldn't incur extra taxes by virtue of the fact that you're saving it rather than spending it.
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