International Finance and Financial Policy

By Hans R. Stoll | Go to book overview

11
Dos and Don'ts for Macroeconomic Policy

E. GERALD CORRIGAN

When I addressed the Japan Society in the fall of 1985, the United States was in its third year of economic expansion, GNP was growing moderately, domestic demand was robust, inflation was dormant, unemployment was above 7 percent, and manufacturing capacity utilization was around 80 percent. 1 In many respects it was a relatively tranquil setting, but signs of major domestic and international imbalances that plague us today were also present. Our trade and payments deficits were high and rising; the dollar was still strong though off its peaks, and the marketplace was digesting the longer-run implications of the two-and-a-half month old Plaza Accord; in the rest of the industrial world domestic demand was sluggish, in contrast to surging domestic consumption in the United States.

At that time I discussed a number of dos and don'ts for macroeconomic policy, and as a prelude, suggested something that is still relevant today-- namely, that the U.S. trade deficit with Japan and the world at large was not subject to a "quick fix." A reduction in the U.S. budget deficit and more balanced patterns of growth around the world are essential elements, but these adjustments will take time. Moreover, a sharp drop in imports would put the U.S. economy at an even greater risk of inflation, a point more true today than in 1985. On the "do" side of the ledger, I suggested an interim target of 2 percent of GNP for the budget deficit by 1988. I said I thought U.S. tax policy should tilt more in favor of greater incentives for savings and investments, and I described the need to revitalize U.S. industry to regain underlying competitiveness.

On the "don't" side I cautioned against the delusion that monetary policy can solve all of our problems or that exchange rate management or some new international monetary system would ever substitute for sound and coordinated

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