Do we need a Fiscal Fed for fiscal policy?
Long after the American economy returns to growth mode, the national debt will continue to soar. According to the Congressional Budget Office, the national debt — as low as 33 percent of GDP in 2001 — will reach 54 percent of GDP this year and grow to at least 68 percent by 2019. Beyond that, the increasing cost of mandatory social insurance spending will certainly push the U.S. debt-to-GDP ratio ever higher in the decades ahead.
So how will policymakers deal with the debt? Well, at some point they will raise taxes and cut spending. (No inflating away the debt, right? Promise?) Indeed, the inevitability of such actions seems an article of faith among bond investors who continue to lend cheaply to America. But uncertainties remain. Which taxes will be raised? Which programs will be cut? And by how much? And when?
For all the talk about the need for transparency in monetary policy, there is precious little in the area of fiscal policy. And this is most unfortunate. Eric Leeper, an economics professor at Indiana University, argues in a new paper that enhanced fiscal transparency “can help anchor expectations of fiscal policy and make fiscal actions more predictable and effective … Fiscal policy is too important to be left to the vagaries of the political process.”
Of course, the political process is tough to escape in a democracy. Any budgetary limits Congress imposes on itself eventually can and likely will be evaded. But imagine, if you will, an amped-up version of the Congressional Budget Office. Like the Federal Reserve, the chairman and members of this “fiscal council” would be nominated by the president. And they would explicitly be tasked with the authority to recommend, or even set, deficit and debt targets.
The head of the council would regularly testify before Congress, as does the Fed chairman, on the nation’s fiscal soundness and whether particular new policies would make things better or worse. Leeper notes that in 2007 Sweden established an eight-member Fiscal Policy Council that offers an independent, no-holds-barred analysis of whether the government’s fiscal policy objectives are being met and are sustainable over the long term.
A U.S. version, for instance, might testify as to whether Congress is ignoring pay-as-you-go budget rules. Or it might actually set a debt target that Congress would have to vote up or down on. The key here is to create an institution with as high a profile as the Fed’s that can highlight current fiscal policy and its real-world budgetary impacts, as well as solutions.
And if the budget situation continues to deteriorate, the council might even be given the power to set some broad budgetary parameters, such as federal spending increases being limited to population growth plus inflation.
And who would be the first chairman of the Fiscal Council? You could do a lot worse than master communicator, legendary tightwad and respected financier Warren Buffett.