LOS ANGELES — Low interest rates are just what the doctor ordered for recessions, pumping up spending on big-ticket items ranging from business equipment to housing. That, at least, is the thinking of the Federal Reserve and virtually all mainstream economists.
But in an article in the latest issue of The Milken Institute Review, George Feiger, a senior adviser at Monitor Group, argues that the unintended side effects will create a very different kind of trouble, undermining the spending power of the elderly and driving underfunded pension plans deeper into the red.
"Retirees living on their investments have experienced devastating reductions in consumable income — down to $10,000 to $30,000 per year per million dollars of financial assets," Feiger writes. "Accordingly, the policy of driving down interest rates to rid the economy of recession could easily come to mean extended periods of financial distress for millions."
Feiger predicts that the politics and economics of low interest rates will have significant effects on policy planning down the road. Among the possibilities: a push toward forced savings and greater limitations on the discretion of tax-sheltered retirement accounts.
Also in this issue of the Review, Peter Orszag, a senior fellow at the Brookings Institution, examines the consequences of the $80 billion in total budget deficits that states have piled up this year, concluding there is no room left to fudge.
"After two years of budget trims, states have largely run out of easy options," he writes. "They are now cutting health care for the poor, slashing higher education spending, releasing prisoners early, and even unscrewing light bulbs to save on utility bills."
The only bright side to the state fiscal crisis, Orszag suggests, is that it might finally force the state to plan ahead for rainy-day budgets.
Other highlights from the new Review:
- Ross DeVol, a Milken Institute economist, looks at the impact of health-care industries to regional economies. "For the past few decades, the health-care sector has been among the fastest-growing in the industrialized world," he writes. "And there is an important race under way to determine which locations will dominate."
- Rudolph Penner, a senior fellow at the Urban Institute and former director of the Congressional Budget Office, offers a primer on the esoteric but vital question of how Congress "scores" the cost of tax and spending initiatives. "It is something of a game — one that brings some discipline to the budget process when it is played well," he writes. "In recent years, though, the game has not been played well."
- Marsha Vande Berg, editor of The World Report, examines China′s latest efforts to modernize its state-owned banking system: "China′s new rulers are circling around what could prove the toughest challenge of their reign — reform of the state-run banking system and the crony Socialist system for allocating capital."
- Richard McKenzie of the UC Irvine Graduate School of Management and Tibor Machan of the Argyros School of Business and Economics in Orange, California, take aim at those who believe that the best way to make business leaders behave ethically is to teach ethics in school. "Perhaps business schools can contribute more to the ethical maturation of leaders-to-be. Perhaps not," they write. "But woe unto those who believe there is a magic bullet for preventing the sorts of lapses in business ethics that have surfaced in the past few years."
- Leonard Burman of the Urban Institute and Joel Slemrod of the University of Michigan Business School take a light-hearted look at economists′ inability to find common ground on tax policy. "In large part," they explain, "the tax debate is not about who should pay or about how to kick-start the economy, but rather about the size and scope of government."
This issue includes an excerpt from Creative Destruction: How Globalization is Changing the World′s Culture, by George Mason University economist Tyler Cowen, who offers a defense of the role of America′s growing economic dominance of culture. (Think movies — very expensive movies.)
Also in this issue is an excerpt from the 2003 Milken Institute Global Conference debate between three winners of the Nobel Prize in Economics, moderated by Chairman Michael Milken; a charticle by Institute Senior Fellow William Frey on multi-race marriages; and a glance at some of the most interesting new economic research from a variety of sources.
The Milken Institute Review is distributed to some 10,000 corporate and financial executives, policymakers, academics and journalists throughout the world. Its editor is Peter Passell, former economics columnist for The New York Times.