Amid Credit Concerns, A Lack of Consensus on Monetary and Fiscal Policy

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"National Association for Business Economics (NABE) members are increasingly concerned over the short-term risks associated with subprime mortgages and other forms of indebtedness, while they continue to cast a wary eye on inflation," says Ellen Hughes-Cromwick, NABE president and chief economist, Ford Motor Company. "Fewer respondents support the monetary and fiscal policies being implemented to address the credit situation, with more than one-third saying current monetary policy is too stimulative."

Survey Highlights

The combined threat of subprime loan defaults and excessive indebtedness remained the number-one concern among survey respondents, with 52% of all respondents echoing this opinion. Inflation was a distant third at just 10%. Some 34% of NABE respondents were most concerned by the lingering effects of subprime mortgages with an additional 18% indicating household and corporate debt was their main concern.

The most serious long-term challenges facing the U.S. economy are health care costs, cited by 22% of respondents, and an aging population, cited by 20%.

Longer-Term Challenges to the U.S. Economy

While the relative ranking of U.S. economic strengths remains the same as the last survey, the emphasis shifted towards greater concern about capital markets. "Labor force flexibility" gained significantly to 53% while "deep capital markets" declined to 10%.

U.S. Economic Strengths

NABE members indicate growing unease over the direction of monetary policy. The percent of respondents judging monetary policy to be "about right" dropped to 48% in March from 72% in August, while those calling policy "too stimulative" more than tripled to 34%. Two-thirds of those surveyed expect short-term interest rates to decline over the next six months, with about half of those respondents expecting a cut of between 26 and 50 basis points. The most frequently cited concerns about lower interest rates are the threat of inflation and the sense that lower rates might "bail out investors who should have known better."

Respondents also expressed misgivings about the direction of fiscal policy. While 49% would prefer to see a "more restrictive" policy over the next two years, almost 70% expect to see a more stimulative fiscal policy over this period. Fiscal policy tools NABE members would find most helpful in the near term include reforming the alternative minimum tax (AMT), health care, and federal entitlement programs, and reducing trade barriers.

More than 91% of survey respondents agreed that the three major U.S. entitlement programs—Social Security, Medicare, and Medicaid—are in need of comprehensive reform. Nearly half felt the need was urgent and 61% suggested Medicare was the top priority. When asked about the effectiveness of various options for Social Security reform, economists felt that raising the age at which benefits could be received and offering incentives to workers for delaying benefit collection were the top two options, in that order. When asked what would be the most equitable of the various reform options, incentives to delay benefit collections ranked at the top while raising payroll taxes on current workers was viewed as least equitable.

NABE members overwhelmingly view globalization of trade, capital flows, and immigration as having a positive, or mostly positive, impact on the U.S. economy. Some 76% view immigration as having a net positive impact on the U.S. economy over the last decade. Respondents indicate that immigration benefits the U.S. economy by addressing the shortage of low-skilled labor (81%), by ameliorating the demographic transition (67%), and by bringing scarce talent to U.S. "knowledge" industries (54%). Indeed, if all illegal immigration were to cease, 71% of NABE respondents opined that U.S. economic growth would slow.