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That advice comes from Edward Gramlich, one of seven Governors on the Federal Reserve Board. He is a member of the Federal Open Market Committee, the group led by Federal Reserve chairman Alan Greenspan that directs U.S. monetary policy.
Gramlich was guest speaker at the June 10 meeting of Commonwealth North, a statewide group of community and business leaders that educate on public policy issues.
He advised Alaskans to get their financial house in order.
"If you can't balance the budget, you ought to balance the budget," Gramlich told the crowd of about 85 people at the Captain Cook Hotel in Anchorage.
Gramlich took office in 1997 as a member of the Board of Governors. He holds a Ph.D. in economics from Yale.
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Banker briefs Gramlich on Alaska issues On his recent visit to the Last Frontier, Federal Reserve Board Governor Edward Gramlich was able soak up some Alaska culture and learn about state issues. Gramlich made several stops around the state in mid-June, including a talk to Commonwealth North on June 10. Joining Gramlich at the head table for that event was Betsy Lawer, vice chair and chief operating officer of First National Bank Alaska. Lawer also is a member of the Seattle-branch board of the 12th district of the Federal Reserve. While here, Gramlich toured the Alaska Native Heritage Center in Anchorage, visited an oyster farm in Homer, attended a neighborhood housing luncheon, and spoke at the University of Alaska. "It's wonderful that we as Alaskans can educate people in his position about Alaska issues," Lawer said. "And on the flip side, it's wonderful that we as Alaskans can speak to someone of Governor Gramlich's stature to learn about the Federal Reserve. "He got a lot of valuable grass roots economic information, which the Fed considers when analyzing interest rates," Lawer said. Gramlich told Commonwealth North that the U.S. economy has a stable rate of inflation, and that it needs both an anchor and flexibility. The Fed can impact the economy by printing money and with its words and policy, but those actions can take six to nine months to take effect. "There is a lag," Gramlich said. "You have to stay ahead of the curve." Regarding his own fiscal policy, Gramlich said that he is tolerant of budget deficits in the short run. "But it is complicated for the national government by the aging Baby Boomers," who will soon by drawing on social security, he said.
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He said Alaska should view the permanent fund as an endowment for the future, where "you can spend the income but not eat into the principal."
Gramlich said Alaska is lucky to have the fund. Spending the principal is prohibited by the state Constitution.
"You don't want to be sitting here at this breakfast 20 years from now and not have this fund," Gramlich said.
Gramlich was asked if permanent fund earnings should be endowed to the state government or paid to citizens.
He said that concept is similar to the idea of privatizing social security.
"If you give people money, they may not keep it safe or invest it well," he said. "I would tread very carefully in that domain."
Regarding another Alaska issue, oil and energy costs, Gramlich said that energy and food prices "have their own life," meaning their performance may not follow trends in the national economy.
"Most of the country is an energy buyer and Alaska is an energy seller," Gramlich said. "Ten percent of places in the world sell it and the rest buy it."
In 1992 Gramlich was director of the Economic Study Commission of major league baseball.
While it is possible for small market teams to compete "without paying big bucks for stars," Gramlich said "Anchorage is too small for a major league team."
From 1994 to 1996 Gramlich served as chair on the Quadrennial Advisory Council on Social Security, a body established to examine the finances of social security and suggest changes.
Even with retirement at hand for the huge Baby Boom generation, Gramlich said that social security will still be available in 2038 when it runs out of assets, although the benefit would have to be scaled back.
"People would still get 80 percent of their benefits if we did nothing," he said.
The most important thing to do to preserve social security is a gradual increase of the retirement age, he said. He also suggested indexing the retirement age demographically, or giving people an equal percentage that would vary depending on year of birth.
As for the current state of economic affairs, Gramlich was asked if the president's tax cut would impact interest rates. Gramlich did not offer specifics.
"I personally would like to see us move back toward balanced budgets in the long run," he said.
He called the potential for deflation a "low probability event" that hasn't happened since the 1930s.
"So historically it's low and the central banks know how to deal with it," he said. "But if it happens is can be very difficult to deal with."
Worldwide, the inflation rate is about 2 percent.
"It's possible to get down too low, and you don't want to do that," he said.
Japan has been hit with deflation.
"It puts borrowers in so much trouble that it's caused problems for banks," he said.
After his formal talk, Gramlich was asked in a media session if the American economy is at the start of a post-war rebound.
"The jury is kind of perpetually out on that question," he said.
He did said the U.S. economy is more stable than in the past.
"We haven't arrived at Nirvana, but we have made improvements," he said.
His talk, entitled "Macroeconomics in the short and long run," noted that the economy will go through "uppsies and downsies."
Regarding monetary policy and its impact on inflation, Gramlich said that "in the long run it's the growth of credit that is the fundamental factor, so the central bank should regulate the flow of credit."
