Hi. We're here with Carl Tannebaum, Chief Economist of Northern Trust. Carl, great to see you.
Good to be with you.
So the new administration seems to have a different take on economic analysis. What's your observation?
I think that's a fair characterization of what's going on. Firstly, the administration has proposed redefining some economic data that's been around for a very long time. Now economic data is not perfect and requires a lot of assumptions to assemble, nonetheless, I worry a little bit if the purpose of redefining the economic data is to prove a point that the administration already has in mind.
So why is the Council of Economic Advisers so important?
The CEA has been around for 70 years and it was established to bring a rigorous economic analysis to the evaluation of government policy. Often politicians don't have the tools or sometimes the will to look at things objectively, and the CEA has provided that. They can look at policies and determine whether they're beneficial to the economy or beneficial to the budget. And if they're not, they can often steer it in a more positive direction. The CEA has had such prominence that several of its directors have gone on to become the Chairman of the Federal Reserve Board.
So what are the potential consequences of this overall approach?
So without a rigorous economic analysis of proposed government policies, we may adopt legislation which appears affordable on the surface, but in the long run will be very expensive. If we grow at less than the rates that are assumed in the budget, the shortfall of revenue could leave us with a lot of debt, a lot of interest that future generations will have to pay off.
So are there checks and balances in the system that could limit potential downsides?
Fortunately, there are. Firstly, the Congress has to approve any budget and they'll ask tough questions about the assumptions that go into it. Secondly, they'll be informed by their own Congressional Budget Office, which is staffed with economists that do impartial work that could certainly catch any overly generous assumptions. Third, the Federal Reserve could have something to say about this if budget plans and policies take us to a place that they're uncomfortable with, they will react with interest rate policy. And then finally, there are the financial markets, which can be very punitive to assumptions that seem overly generous and they'll reflect their displeasure in stock and bond prices.
Carl, thanks for your time.