Cato Daily Dispatch for November 11, 2005
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House Republicans Postpone Budget BillU.S. Trade Deficit Grows
Bernanke on Inflation Targeting
House Republicans Postpone Budget Bill
"House Republican leaders were forced to abruptly pull their $54 billion budget-cutting bill off the House floor yesterday, amid growing dissension in Republican ranks over spending priorities, taxes, oil exploration and the reach of government," according to the Washington Post. "A battle between House Republican conservatives and moderates over energy policy and federal anti-poverty and education programs left GOP leaders without enough votes to pass a budget measure they had framed as one of the most important pieces of legislation in years."
In a new Cato book, Downsizing the Federal Government, Chris Edwards, director of tax policy studies, provides policymakers with solutions to the growing federal budget mess. Edwards identifies more than 100 federal programs that should be terminated, transferred to the states, or privatized in order to balance the budget and save hundreds of billions of dollars.
Edwards proposes a balanced reform package of cuts to entitlements, domestic programs, and excess defense spending. He argues that these cuts would not only eliminate the deficit, but also strengthen the economy, enlarge personal freedom, and leave a positive fiscal legacy for the next generation.
U.S. Trade Deficit Grows
"The United States trade deficit widened by a surprisingly large 11 percent in September, reflecting both a surge in energy imports after Hurricane Katrina and a steep drop in airplane exports because of a strike," reports the New York Times. "The United States imported $66.1 billion more in goods and services than it exported in the month, breaking the record of $60.4 billion set in February, the Commerce Department reported."
In "America's Record Trade Deficit: A Symbol of Strength," Daniel Griswold, associate director of Cato's Center for Trade Policy Studies, argues that Americans should not be concerned about a trade deficit: "Economic theory and experience show that trade deficits are driven by levels of national saving and investment in the U.S. economy, not by allegedly unfair trade barriers abroad or by declining industrial competitiveness at home. America's record trade deficit is a symbol of economic strength, reflecting a strong net inflow of foreign investment drawn to America's dynamic economy.
"Growing trade deficits signal improving economic conditions, while shrinking deficits often occur in times of economic trouble. During the last 25 years, the U.S. economy has on average grown about a percentage point faster, 3.5 percent vs. 2.6 percent, in years when the trade deficit expanded compared with years when it shrank. The unemployment rate on average fell 0.4 percentage points during years of rising deficits and rose 0.4 points when the deficit shrank."
Bernanke on Inflation Targeting
"If economists had seats at Ben Bernanke's confirmation hearing, the potential successor to Alan Greenspan could expect to field a lot of questions about inflation targeting," the Wall Street Journal reports. "Nearly a third of economists said if they could ask one question of the nominee when he appears before the Senate Banking Committee on Nov. 15, they would quiz him on whether and how the Fed should select a target for inflation.
"Mr. Bernanke has been an outspoken proponent of setting a formal, public goal for a specific low inflation rate that the central bank is committed to meet. It is a controversial approach to monetary policy and one that Mr. Greenspan avoided during his 18-year tenure as Fed chairman."
In his keynote address at Cato's 23rd Annual Monetary Conference, "Monetary Institutions and Economic Development," Rodrigo Rato, the managing director of the International Monetary Fund, praised inflation targeting, arguing that countries adopting such targeting experience less volatile inflation. He says, "Based on the evidence to date, inflation targeting appears to be a promising institutional framework that delivers low and stable inflation."
Greg Garner, editor, ggarner@cato.org