Editors' Summary

Editors' Summary William C. Brainard and George L. Perry The brookings panel on Economic Activity held its seventieth conference in Washington, D.C., on September 7 and 8, 2000. This issue of Brookings Papers on Economic Activity includes the papers and discussions presented at the conference. The first paper analyzes the effects on national saving of alternative proposals for Social Security reform and how these effects depend on what policy rule governs the overall budget. The second paper proposes that the sharp rise in the stock market in recent years reflects increases in intangible and unobserved "e-capital." The third paper reviews recent developments in real estate markets and assesses the risk of a crisis in the sector. The next three papers address various implications of the unexpected emergence of federal budget surpluses and the consequences of sharply declining government debt. The first of these examines the effect of improving fiscal balances in most major industrial countries on the level and term structure of interest rates. The next considers the effects of declining government debt on the efficiency and liquidity of financial markets and the future conduct of monetary policy. The third asks whether a reduced stock of debt will impair the government's ability to implement optimal fiscal policy. Finally, the seventh paper in this issue examines to what extent official corruption inhibits foreign direct investment in developing countries. The bright fiscal picture of the federal government today stands in sharp contrast to that drawn by economists and policymakers a decade ago. Between 1992 and 2000, the federal budget balance improved from a deficit of nearly 5 percent of GDP to a surplus of nearly 2½ percent. By raising the base for economic growth, this performance has also greatly [End Page ix] improved the outlook for the future. Official projections in 1993 foresaw deficits of the unified budget (the broad budget concept that includes Social Security) in excess of 10 percent of GDP by 2010, and worsening rapidly thereafter. Today official projections show surpluses for the next half century. In contrast to this rosy prospect for the unified budget, there has been little change in the funding difficulties projected for Social Security and Medicare. However, the changed fiscal outlook has shifted the debate about reforming those programs away from benefit cuts and tax increases to using the emerging budget surpluses to prefund future obligations. In the first paper of this issue, Douglas Elmendorf and Jeffrey Liebman integrate budget politics with the economics of the Social Security problem. After reviewing the dramatic improvement in the federal budget and discussing the importance of prefunding Social Security, they present an analysis of reform proposals that explicitly incorporates the political process. They then use this framework to show how various reform proposals are likely to differ in their effects on national saving and capital accumulation. Elmendorf and Liebman begin by describing the emergence of federal budget surpluses in the 1990s, which reflect faster productivity growth, more moderate increases in spending, and higher revenue relative to GDP than had been expected early in the decade. By mid-2000 the Office of Management and Budget (OMB) was projecting that surpluses in the unified budget between 2001 and 2010 would total $4.2 trillion absent any changes in policy. The authors note that this current projection, which represents a dramatic change from projections made only a few years ago, although undoubtedly good news, is itself evidence of the unreliability of projections far into the future. Rates of long-term productivity growth and the projected cost of health care are both highly uncertain. If tax receipts return to their average share of GDP before the late-1990s surge, the surplus would be smaller by 1 percent of GDP. And if real discretionary spending remains a constant share of GDP, rather than a constant real dollar amount as in current projections, the surplus would fall by a like amount. But although the authors perceive substantial uncertainty about future budget outcomes, they have little doubt that the outlook has improved dramatically and that the improvement has changed the terms of the public debate about Social Security reform. Population aging is the primary reason for Social Security's problems. The...