While America has succeed in taming inflation, University Interim Provost Edward Gramlich said the United States still has a long way to go in correcting its monetary policy.
Last night, students packed East Hall’s auditorium to attend the annual State of the Economy Address sponsored by the Michigan Economics Society. Issues brought up at the address ranged from minimum wage to tax reform.
This year’s event featured Gramlich as the key speaker. Gramlich served on the Federal Reserve Board of Governors for eight years before returning to the University this past September. A former economics professor, he is an expert on macroeconomic issues, including budget policy, income redistribution and tax policy.
Gramlich focused his speech on inflation and price stabilization. A quarter century ago, the sole focus of most industrialized countries was inflation rates, Gramlich said. At that time, the United States had inflation rates of about 10 to 12 percent and has since made drastic improvements to bring inflation rates down to a steady 1 to 2 percent.
Rising food prices, oil prices and indirect tax rates due to inflation are to be expected and are no reason for concern, Gramlich said. He added countries facing persistent inflation can blame central banks for making poor monetary decisions. In this regard, the United States has excelled at controlling inflation in the past decade, he said.
But Gramlich warned the Federal Reserve from reducing inflation down to zero.
“I think true prices are stable, and we don’t need to go any lower with inflation. We can declare our monetary policy a success and move on to other important economic issues.” he said.
Gramlich said that because prices in high-tech markets skew the inflation rate, the inflation rate is always a little lower than actually reported. To bring the inflation down to zero would run the risk of entering a state of deflation, he added.
He evaluated the current condition of the economy as “fine.” Overall national unemployment is down and remains close to a healthy long-run level that will not lead to inflation.
In the long run, Gramlich talked about the United States running into a huge budget deficit wall caused primarily by Social Security and health care programs. “We have too many budgetary promises out there that we simply have no way to pay for,” he said.
Internationally, the United States faces many problems, with the country suffering from a huge current account deficit, meaning that U.S. imports wildly exceed the exports, Gramlich said. It’s up to 7 percent for the past year, as large as it’s ever been in our history, he added.
The dominant factor in bringing this problem into balance would be the dollar falling, Gramlich said. This was supposed to happen, most experts have said. However, it has not happened because the expected slowdown of foreign demand for U.S. currency has yet to take place.
In fact, foreign central banks, especially those in East Asia, are buying U.S. dollars more rapidly now in order to finance U.S. trade deficits. Gramlich said this is done in order for them to subsidize their exports and keep their own currencies weak. As a result, the U.S. remains hooked on overconsumption, and the vicious cycle repeats, he added.
America must become more fiscally disciplined and significantly cut overall government spending if it wants to make any real progress toward ending the current account deficit and budget deficit.
LSA junior and economics major Jeannette Yeung said, “I thought the Q&A session was very stimulating and I especially enjoyed his remarks on Social Security and the minimum wage.”