There is one sentence in Alan Blinder's and Ricardo Reis's paper on the Greenspan era that I wish had been greatly expanded, into a page, or a section--or a book. It is: "we are perfectly comfortable with the long-standing practice of central bankers all over the world to rail against excessive fiscal deficits." The principal criticism that future historians may make of today's Federal Reserve is that it has not been vocal enough on this issue. In the long-run the Federal Reserve must fail to provide price stability if nominal government debt grows significantly faster than real GDP. Our High Politicians in Washington have dismantled the institutional and procedural mechanisms--for example, the Budget Enforcement Act--that effectively constrained government debt growth. Unless these mechanisms can be rebuilt--which will, I think, require that future Federal Reserves take a more active and aggressive role in lecturing High Politicians on their fiscal fecklessness--future FOMCs may well find that effective price stability is unattainable. The long-run stakes are very high. There is no sign that our executive and legislative branches understand them.
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