AmEmbassy-Bucharest APO AE 09213-1315 July 20, 1994 The Honorable Alice Rivlin Director, Bureau of the Budget The White House Washington, D.C. Dear Ms. Rivlin: Congratulations on your promotion to Budget Director. Based on your reputation as an outstanding economist and what last week's Economist characterizes as your "expenditure-cutting swoops [which] are the fiercest of all", I am looking forward to what you can do to bring national expenditures under some control. I know I'm trying to teach someone to suck eggs, but sometimes we don't remember all we know -- or at least recognize its possible applicability to a problem before us. So forgive me for reminding you of a couple of things which I know you are already fully aware. One of the elements of U.S. government which always presents problems for the people in the White House is the independence of the FRB. It is said by some that George Bush lost the last election in part because he couldn't get the Fed to cut interest rates as quickly as he'd have wished to get the already beginning expansion underway at a faster clip, so the recovery would be recognized by the media before people went to the polls. People cast their ballots thinking we were still in the midst of a recession when the recovery was already in process. Same thing happened at the end of the Eisenhower Administration, and JFK inherited an expansion already incipiently underway. And I read that the current Administration is concerned that Mr. Greenspan's preoccupation with inflation, and his several recent rate rises, risk short-circuiting the expansion as we go into another election year. As an economist myself, and retired FSO who's spent thirty years watching how others do it (as Economic Advisor to our OECD Mission and as Counselor of Embassy in other Posts in Europe and elsewhere abroad), I think the arguments in favor of Fed independence outweigh those against it. But I do wish the White House had more tools it could use without having to pit its judgment against either the Fed (on monetary policy) or the Congress (on fiscal policy). You'll recall that Dutch Nobelist Jan Tinbergen gave us the wisdom that policy instruments must at least be equal in number to policy objectives. And we don't seem much able these days to activate the Foreign Economic Policy Coordination Instrument among our Japanese and German partners to provide the additional leeway we had back in the heady JFK days when I was note-taker for Walter Heller and Gardner Ackley during their Paris visits to the OECD. It occurs to me that this may be a time to look at a couple of tools the Brits and Swedes use which might afford BOB (and the President) a couple more policy instruments and a degree of White House independence from the Fed and Congress. The Brits use what they call "the Regulator" for this purpose. This is advance approval from Parliament for the Prime Minister, at his own initiative, marginally to raise (or lower) a number of pre-approved excise taxes, e.g. on beer, cigarettes, etc. This avoids the Government's having to go to Parliament for every fine tuning effort it considers necessary. More importantly, it avoids the political battle and legislative time lag which in so much of our recent economic history has meant that policy changes are being implemented at just the counter-indicated moment. That is, tax cuts just as we approach an expansionary peak, or a tax increase just as we're entering the next recessionary phase. With "Regulator Legislation" in place, the White House could play its own fiscal policy game -- at least around the edges of the economy -- offsetting, if not negating, moves by the Fed with which the Administration is in disagreement. And I'm sure OMB and the Treasury could quickly come up with a dozen other likely items for inclusion on a U.S. Regulator list. There is of course the question of Constitutionality, since the Court has in the past held that Congress can't delegate its responsibilities. But I think that it could be successfully defended that all Congress had charged the President with doing is choosing the time to implement what has already been validly legislated. And there have been recent decisions which lead one to think that for specifically defined areas and amounts the Court would find acceptable what might have been questioned forty years ago. Certainly it has become practice for Congress to leave to the President to decide when a specific country (e.g . China) is in compliance with an Act of Congress so that pre-legislated trade or other agreements can enter into force. You might at least wish to vet out this possibility with Senator Moynihan and Congressman Gibbons -- both of whom seem to me more economically knowledgeable, and flexible policy-wise, than their recent predecessors. The Swedes have for many years had in place a practice of requiring companies to set aside a stipulated portion of earnings for reinvestment, to be held in Treasury impound. The Executive can then hold sterilized such privately owned but government controlled funds to avoid overheating during the later stages of an expansion, or release the funds for use during a time-defined period once a slow-down has been detected, to moderate or offset the next recession. This has proved a valuable policy tool in smoothing out the peaks and valleys of the Swedish economy. The legal issues, again, may at first sight appear imposing. But the uncompensated taking of private property question seems to me to be settled by the fully parallel reserve requirements of the FRB as applied to the banking community -- and the practice has now been going on without question for over sixty years. Impoundment of investment reserves would make a dandy new policy instrument available to the Executive Branch, independent of the Fed, and once enacted, without the time lag inherent in going to Congress for the equivalent tax increase or stimulatory investment tax credit. I think both Messrs. Moynihan and Gibbons might also see the light on this suggestion. Sincerely, D. B. Timmins, PhD (Harvard), FSO (ret.) AmEmbassy-Bucharest APO AE 09213-1315 July 20, 1994 The Honorable Alice Rivlin Director, Bureau of the Budget The White House Washington, D.C. Dear Ms. Rivlin: I wrote you a month ago with a couple of ideas I thought you might wish to consider in your attempt to reduce the budget deficit and get the national accounts under control: adoption of a British-style "Regulator" and a Swedish-style corporate investment sterilization account. We've recently arrived in Romania, and unpacking files from our previous post, I ran across the enclosed paper written a few years ago in Mexico containing several other ideas you or your staff may wish to take into consideration. The notion for a cross-border Free Trade Area has of course since been implemented with Canada and Mexico in the form of NAFTA (I like to think my article in the Foreign Service Journal detailing this notion -- copies of which were sent by the Journal to all Senators and Congressmen -- may have contributed to this legislation). And the creation of ASEAN a few years ago is a first step towards broadening the OECD model to South East Asia. I just wish we'd been quicker off the mark in getting an Eastern European version of the OECD in operation to give Russia and her former satellites closer relationship with Western Europe and the United States without getting Russia involved in the G-7. With sincere best wishes for success in your new undertaking. David B. Timmins Professor of Finance & Economics (ret.) AmEmbassy-Bucharest APO AE 09213-1315 February 25, 1995 The Honorable Alice Rivlin Director, Bureau of the Budget The White House Washington, D.C. Dear Ms. Rivlin: Have written you twice since the Presidential election of 1993: first to advance some ideas which had come to my attention while serving as Deputy Economic Advisor and Rapporteur to the U.S. Mission to the OECD back in the days of JFK, Walter Heller, and Gardner Ackley, and afterwards to advance the idea of our adopting a British-style "Regulator" and a Swedish-style Corporate retained profits set-aside in the Treasury to enable the President to activate some legislatively pre-approved measures to affect the economy on the margins when he disagreed with the direction or speed the Fed was taking I'm writing again because I just read in the February 23 International Herald Tribune (p. 3) that the President is backing off his proposal to introduce a border crossing tax for Canadians and Mexicans. As a retired Foreign Service Officer who served in Mexico, I've wondered for a long time why we don't in fact charge Mexicans for their visas or Border Crossing Cards to enter the U.S. just as they do U.S. tourists. Why don't you raise this matter with the State Department (better still, simply get the President to instruct Secretary Christopher) to introduce a five or ten dollar charge for a visa (or "mica") to help offset the cost of enhancing the border patrol? Additionally, I suggest that the U.S. introduce a charge for all foreign visitors a la Suisse for all those intending to use the U.S. Freeway system -- to the cost of construction of which they have not contributed (see Item 1, enclosed paper). This would be virtually self-enforcing for visitors from Canada and Mexico using foreign license plates. If a foreign plate vehicle doesn't display an Interstate permit, it'd be subject to a local state fine as well as a substantial federal penalty. We'd have to rely on car rental companies to sell visor-mounted, time-limited permits to European and Asian visitors presenting a foreign driver's license at the time of rental. I enclose a second copy of a paper proposing this and other revenue-enhancing (largely user fee-type) measures. Several talk shows, including the McLaughlin Group, have given the Republican Congress "A" grades for their accomplishments in the first fifty of their hundred day program. More importantly, virtually all commentators have said that if the Administration doesn't respond with its own reform proposals, we're in for a dismal electoral experience in 1996. I suggest that there's probably never been a better moment for a major move on the part of Mr. Clinton to push for introduction of a Value Added Tax. Some of Mr. Clinton's own supporters have come out in favor of a "flat tax". A VAT, with a food and medical care examption would be preferable to this since a VAT would enable a substantial income tax cut to middle income earners (thus fulfilling the President's promise), provide a notable boost to exports through permitting rebates to exporters, and raise our savings/investment rate (which is currently at an all-time low), since taxes would then rest on spending, not on saving. I hope you will also read carefully the enclosed notions for user fees for foreigners visiting National Museums, variable Social Security payments to entitled foreigners residing abroad, and the concept of subsidized "sump industries" as a form of "workfare" welfare reform (The Economist has recently recommended this as better than most alternatives). As a final comment, may I say that we'd have encountered fewer problems with Mexican bankruptcy if we'd adopted my more nuanced notion of a Transborder Free Trade Area leaving the adjoining Mexican and America States to work out the details, rather than going for an all-out NAFTA which I knew from my experience in Mexico that our South of the Border neighbor wasn't ready for. Sincerely, D. B. Timmins, PhD (Harvard) FSO (ret.), Professor of Finance & Economics (ret.)