Interview with Alice Rivlin

Vice chair of the Federal Reserve Board of Governors is the latest in a series of public service positions Alice Rivlin has held over the past 30-plus years. In 1996 she made the shift from fiscal to monetary affairs with ease. As director of the Office of Management and Budget in the Clinton administration and as founding director of the Congressional Budget Office from 1975 to 1983, Rivlin was known to be a strong administrator. That's a role she continues at the Fed as administrative governor responsible for the Board's budget and staff. Regarding talk of a top to bottom review of the Fed's Washington operations, Rivlin says, "I think the Fed does need to look at itself very, very carefully. ... I'm going to try to do that."

In the following interview, Rivlin talks more about where the Fed might be headed in a changing, global financial system. And in a lighter vein, she shares her travel adventures in far-flung places.

REGION: American presidents often surround themselves with economists and not with poets. Is that as it should be?

RIVLIN: I think presidents need both economists and poets—the poets to keep them sane and to keep them focused on the right values. But economists are useful too. Presidents face very difficult choices about the economy. Economists aren't always right, but they know how to structure the choices. And that's why they tend to find themselves in the White House.

REGION: If you go back far enough, there were probably more poets than economists. So I wonder that we have so many economists means anything. And what does it tell us about our culture?

RIVLIN: I think it tells us that our economy is more and more complicated, also that economists know more and have more to offer to policy-makers than they used to have.

REGION: In your book Reviving the American Dream you examine the issues threatening the American dream. What threatens the American dream?

RIVLIN: There's a general discouragement, though perhaps not as strong now as when I wrote the book in '92. The average family is worried about their economic future and their children's economic future. The optimism about the American economy is a lot lower than it used to be. People feel insecure and worried. The book was an exploration of how we might get average incomes growing again, growing faster over the longer run, which is what I think it takes to restore confidence in America as a place where people who work hard can expect to do better than their parents did.

REGION: In that book you talked about common shared taxes. Sounded like an intriguing idea. Is there a simple way to understand it?

RIVLIN: Yes. States compete very heavily to have lower taxes, so that they can get more business and so that upper-income people will like to live in their state. And yet we're loading more and more responsibility on states for the provision of public services. The proposal that I was making in that book was for some common taxes, for example common sales taxes, that would be collected on a uniform basis and a uniform rate across the country and shared by the states on a formula basis. That gets away from the competition at the border. Most states have sales taxes now. There are, I think, only five states who don't. But they have them at different rates and they're reluctant to raise them. Common shared taxes are a way of both simplifying the tax structure and getting more uniformity across the country. It would be easier for businesses that do business in a lot of different states if the structures were not so different. A good candidate for a common shared tax would be the corporate income tax.

REGION: It's been reported that you plan a top to bottom review of the Fed's Washington operations. Is that review under way?

RIVLIN: Well, I'm the administrative governor. And the administrative governor is responsible for overseeing the Board's staff and budget process and so forth. So I'm doing that. With respect to the budget process, we are trying to do something new this year—a biennial budget rather than an annual budget—and to put more emphasis on planning ahead. The Board has done some planning. That's not new, but we will try to do more explicit, longer-range planning and then to do a two-year budget in the context of that planning. And I think the Fed does need to look at itself very, very carefully. So I'm going to try to do that.

REGION: Okay, but no hints on what direction that might head?

RIVLIN: No.

REGION: As I understand it, initially you didn't want the job as governor of the Federal Reserve. What changed your mind?

RIVLIN: Off and on over my career, I've been asked if I wanted to be on the Federal Reserve, usually when I was doing something else that I loved doing. One time I was running the Congressional Budget Office. I was doing something very exciting that I wanted to go on doing. And then later, when I was in the Clinton administration, I was asked about the Fed, but I was fully engaged at the Office of Management and Budget and didn't want to leave that. But after I'd been there for almost four years, it did seem, perhaps, time for a change.

REGION: The Federal Reserve Board has developed FRBUS, a large macroeconometric computer model used for forecasting and policy simulation. Do you think this is a useful model? And does the Board put much weight on this new model or any other model when determining monetary policy?

RIVLIN: The Board relies on a wide range of different types of information, analyses and projections in determining monetary policy. It's a process of assembling all the input we can, discussing it thoroughly and then making a judgment call. The FRBUS model is beginning to prove useful, especially for simulating policy alternatives, and is definitely an addition to the kit of tools. We also look at the results of other models and a wide range of other information. I have been particularly impressed by the richness of the regional information that the bank presidents bring to the FOMC table. I have never had such a sense of being in touch with all parts of the economy as I have now at the Fed.

REGION: With your extensive background on budgetary matters you must come to the Fed with some well-formed ideas about how a public institution should manage its money. Is that true?

RIVLIN: Public institutions should manage money very carefully. There's no magic to doing that. They need to think about their mission and how best to accomplish it with the resources available. They certainly have a special responsibility to use the public's money wisely.

REGION: Do you see differences with the way the Fed correctly manages its money compared with other organizations—OMB, CBO—that you know well?

RIVLIN: Not obviously, no.

REGION: You've expressed a great interest in the issues of the international sector. Should the Fed play a different role than it has around the world?

RIVLIN: I think it's inevitable that we will all be much more involved in international matters as time goes on. It's an increasingly global economy; nations and their central banks are more involved with each other. Financial markets are more closely linked than they were, and the volume of international transactions is enormous. Also the group of advanced industrial countries is broadening very rapidly. One part of my job that I'm enjoying a lot now is going to the Bank for International Settlements (BIS) and some other international organizations. At the first BIS meeting it took in nine new countries. And then during the same trip, I was at a meeting of the G10 Governors at which we were putting the finishing touches on the New Arrangements to Borrow, which also call on a wider range of countries for standby financing for the Inter-national Monetary Fund.

REGION: The vice chair usually does most of the international work, but as it gets more and more involved, does the responsibility spread to the other governors as well?

RIVLIN: I haven't been here long enough to know what's usual, but there's more international involvement than the chairman and the vice chair can handle. Larry Meyer is now picking up some of the international responsibility. He's going to Tokyo this week [the interview was conducted in early March] for a meeting of a new group called the G6, and Susan Phillips is going to meet with the central banks of the Americas in Lima, Peru.

REGION: My understanding is the focus of international activity tends to move around geographically. For instance, we may be working on European issues and then another part of the world might heat up. Have you sensed in your short tenure any change in the focus internationally?

RIVLIN: Generally speaking, the focus is broadening, and certainly over the last couple of decades Asia has become much more important in the world economic scene than it was. But the focus on Europe, since I've been there, has also been very heavy because of the interest in the European Monetary Union.

REGION: You gave the keynote speech last year at the Economic War Among the States Conference in Washington in which you suggested that voluntary agreement, rather than federal preemption, was a better way to address the problem created when states compete for private businesses. As readers of The Region magazine know, the Minneapolis Fed's 1994 Annual Report argues that Congress needs to prohibit preferential treatment for private business because, among other reasons, voluntary agreements won't work. These preferential deals have continued apace over the past year with no sign that states are willing to end the practice on their own. Is it time for Congress to step in?

RIVLIN: I don't think so. Federal preemption in this area would probably do more harm than good. There are lots of positive aspects to the competition among states. It can be destructive, as some of the people at that conference pointed out, if states offer special deals to companies. Competitive tax reduction and other subsidies can turn out to be very costly. And that has happened. And that's a dumb thing to do; states shouldn't do it. Citizens should make sure that they don't. There have certainly been examples where the cost per job created was excessively high. But I don't think the answer to that is the federal government stepping in. One answer is a more sensible policy at the state level. Another is states working together on a regional basis. The healthiest thing would be to shift the competition away from tax breaks and toward improving services. The best thing that could happen is if states engaged in an aggressive effort to improve their infrastructure and improve their education systems in order to attract business. That's a win-win situation.

REGION: The Region's previous two cover interviews, Ed Prescott and Jim Tobin, disagreed on questions about business cycle theory. According to Prescott more resources should be put toward understanding why some economies grow faster than others, while Tobin thinks we should continue to emphasize business cycle research. Given limited resources, where would you put the emphasis?

RIVLIN: I don't think that's a choice. We have not abolished the business cycle, so we have to continue to understand how it operates and what we can do to mitigate the damage caused by excessive volatility in the economy. But the basic question that faces all of us is: How can we grow faster?

REGION: Governor Lindsey was the enthusiastic point person for the Fed on questions of the Community Reinvestment Act (CRA). Who will carry on in his place?

RIVLIN: I'm very interested in CRA, and so is Larry Meyer. Larry is going to chair the committee, I'm going to be a member of it and I hope that together we can keep up the Lindsey tradition. I'm a strong believer in community reinvestment, but I also think we should avoid excessively burdensome regulation. There have got to be better ways to get results. But CRA has raised the consciousness of banks. It has gotten them thinking more about their communities. We need to reinforce that and to encourage banks and communities to work together. Financial institutions need to be leaders in community development.

REGION: Here's another "Minneapolis" question. The Minneapolis Federal Reserve has thoroughly studied the issue of deposit insurance reform. And recently, President Stern has suggested that the current period of relative economic stability is a propitious time to reform deposit insurance. Do you agree?

RIVLIN: It's usually easier to accomplish reforms when the economy is going well, but the question is more complicated than just deposit insurance. The whole financial system is undergoing enormous changes at the moment. We may in this Congress get financial modernization legislation that will substantially broaden the powers of banks and bank holding companies. In that process, it's important to think clearly about deposit insurance and be sure that the subsidy involved in deposit insurance doesn't leak into other kinds of activity. There are various proposals for how to do that, but I would agree that deposit insurance is an important part of the whole question of how the financial services industry looks over the next few years.

REGION: Chairman Greenspan has appointed you head of a strategic planning commission to which several key staffers from the Minneapolis Fed are assigned. Can you tell us about the commission and its progress to this point?

RIVLIN: It isn't a strategic planning commission, it is a committee on the payments system. Its mission is to examine the role of the Federal Reserve in the payments system and how it might change. It is a very important subject to the financial services industry as a whole as well as to the Federal Reserve. We're trying to look at alternative roles of the Federal Reserve: the Federal Reserve continuing its current role in priced services for payments; the Federal Reserve taking more leadership in moving the system toward electronic payments; the Federal Reserve gradually moving out of retail payment services, at least. And we're trying to figure out the implications of those various role changes and the advantages and disadvantages of each.

REGION: And any sense of how that is playing out?

RIVLIN: It's very much a work in progress. We've had enormously good cooperation from across the system and indeed outside the system. What we're doing now with the assistance of staff from Minneapolis, and other Reserve banks, is trying to define these scenarios and collect the information. We will hold a series of forums in different parts of the country to which we will invite banks, clearinghouses, data processing people, other interested parties to come in and tell us what they think; whether they think we have the scenarios about right and what they think would be the advantages and disadvantages of alternative Fed roles. We don't expect to find unanimity, but we expect to get a sense of what people with different kinds of stakes in the system think.

REGION: I would assume that the existing bias of those scenarios would be business as usual, since mostly you have Fed people involved. Is that not a correct assumption?

RIVLIN: No. We're trying very hard not to have a bias and I've been very gratified with the seriousness with which everybody has taken this assignment.

REGION: The Fed typically makes decisions through a consensus process. Is that your style?

RIVLIN: I think it's a style of any successful organization. It can be taken to excess, of course, if it impedes decision making. But a leader who doesn't have his troops behind him is not going to do very well.

REGION: But at the same time, a leader who tries to get everybody to agree sometimes finds that lowest common denominator, which might not be the right solution.

RIVLIN: That's right. That's why you really have to do things, like creating this payment system committee, to get the issues very clearly defined so people can deal with them.

REGION: You've held so many interesting and high-level jobs in your career. I'm sure that most people don't know that you were once an editorial writer for the Washington Post. Tell us about that experience.

RIVLIN: Oh, I had a wonderful time. This was a long time ago—the summer of 1971. I had done some writing for the Washington Post and they lost their economics editor at the beginning of the summer, I had just finished a book, so Meg Greenfield, who was the deputy editorial page editor (she's now the top person), asked me if I would come for a few months and fill in. And I did. I didn't really anticipate how exciting it was going to be. Suddenly we had the Nixon "new economic policy," went off the Gold Standard and introduced the wage and price controls. It was just a wonderful time for an economist to be writing editorials and articles for a major newspaper. There was a lot to write about. I even wrote an article about the Federal Reserve, which I found recently. It still reads pretty well.

REGION: Nothing that would embarrass you?

RIVLIN: Nothing that embarrassed me.

REGION: Was there someone who profoundly influenced your intellectual development during your Bryn Mawr and Radcliffe days?

RIVLIN: Well, there were a number of people. My first economics professor was very important simply because he got me interested in economics. He was Reuben Zubrow, who has recently retired from the University of Colorado. At that time he was teaching at Indiana University, where I took a summer school course between my freshman and my sophomore year. I decided economics was really fun, so I changed my major. I think the person who probably influenced me most, but a little later in my career, was Joseph Pechman, who was the director of economic studies at the Brookings Institution. He was a very vigorous, energetic public policy economist and ran the economic research program at the Brookings Institution for many, many years. I was one of Joe's protégés.

REGION: Is there a line of thinking that you picked up from him or . . . ?

RIVLIN: Mostly just how to do good public policy analysis.

REGION: Through many years of high-visibility, public jobs you've remained a low-profile person. Do you agree with that?

RIVLIN: Oh, I don't know. I have been pretty visible and high profile at some times in my career. Probably the high point of my name recognition on streets and in airports was at the beginning of the Reagan administration. I was at that time director of the Congressional Budget Office and testified a great deal on the Reagan budget. We warned that the Reagan budget would create high deficits. We were right. But actually we didn't know the half of it. The deficits were much worse than anything predicted by the CBO.

REGION: In our Region interview, we try, not always with success, to ask about personal interests: hobbies, musical interests, preferences in literature. What does Alice Rivlin do when she's not setting monetary policy or administering the Federal Reserve?

RIVLIN: Well, several things. I play with my grandchildren. My two-year-old granddaughter is coming over this evening. And I'm a big outdoor person. I have a group of friends that have gone on an outdoor trip every summer for about 15 years. We've been to Alaska several times. We've been to the Himalayas a few times. We've been to Peru. We've done trips in Colorado and Wyoming. And it's been very exciting. And speaking of The Region, in January I went way up to the Boundary Waters [in Minnesota]. We were up north of Duluth, north of Grand Marais. And we went into a wilderness lodge and did some snow shoeing and some cross-country skiing and some dog sledding. I've never done dog sledding before, and it was great fun. It was a very good trip, except that one of my friends broke her leg, which was a real downer.

REGION: Do you have another trip planned now?

RIVLIN: We're going back to the Yukon, where we did a very terrific trip about three years ago on the Tatshemshemi River. That was a rafting trip, but this summer we're planning a canoe trip.

REGION: Thank you, Ms. Rivlin.

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