Rate Watch #767 Read This. Comment on It and Distribute It.

Rate Watch #767 A Political & Economic Solution to the Deficit

March 18, 2011
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

A Call for a Council on Fiscal Sustainability
By Jurgen Brauer and Dick Lepre

On December 1, 2010, the National Commission on Fiscal Responsibility and Reform issued a comprehensive plan for fiscal sustainability. It has been ignored by Congress and the administration. Fiscal responsibility, and hence sustainability, appears incompatible with the politics of reelection. We suggest a way to eliminate this incompatibility.

What taxes are to be raised and what the government spends money on are value issues best left to those elected. But the economics of the size of the deficit is best handled by economists. This dichotomy is the essence of our proposal.

Congress recognizes that the country's debt path is unsustainable. While the economics of the matter is straightforward - cut spending, raise taxes, or both - the politics is not. And if voters cannot insist, or are not going to insist, on fiscal sustainability, and if Congress is not going to control public finances on its own accord, then one must conclude that the fiscal process is lacking a necessary ingredient. To supply it, we propose the creation of an independent Council of Fiscal Sustainability. Under enabling legislation, its members - presumably economists - would be appointed by the President, and confirmed by the Senate, to nonrenewable 14 year terms and report to Congress twice a year. This is not a revamped Congressional Budget Office, nor a refurbished Council of Economic Advisers, but an independent agency akin to the Federal Reserve Bank.

The CFS would have a single task: It would place before Congress an annual maximum budget deficit figure that is economically sound over the medium to long term. (Alternatively, it would annually set the federal debt limit.) In planning the budget, Congress would look at projected spending and revenue and, if the difference exceeded the CFS number, it would have to cut spending or increase taxes or some combination of the two. Our notion is not idealistic: It just recognizes a fundamental constraint of the current political structure to act in the best interest of the nation's long-term economic health.

The enabling legislation must mandate that the deficit limit presented to Congress be accepted unless it is voted down by a resolution of disapproval. There is precedent: The Base Realignment and Closure (BRAC) process regarding military base closures is an example whereby a "this takes effect unless you vote to disapprove" process helped achieve the desired goal in a manner that was politically acceptable. We believe that this process meets the requirement of constitutionality. Creation of the CFS thus gives each member of Congress a new degree of political freedom. "You folks needed those roads, and under the CFS deficit limit, taxes had to increase to pay for them". Or, "I voted to limit spending because under the CFS deficit limit, the alternative would have been to raise your taxes."

We know from the experience of the very many countries - eighty nations as of 2009 - that have introduced so-called fiscal rules that two issues are key: The rule needs to be credible, and it needs to be flexible. For instance, the United Kingdom put its fiscal rule in abeyance when it found that it was not sufficiently flexible to deal with the extraordinary economic environment of 2008/9. Thus, writing legislation to set up the Council will need to address budgetary eventualities, pre-commitments of when it is, and is not, permissible to breach annual deficit limits. It would also have to come with phase-in provisions, such as those passed in Germany, so that the transition from unsustainable to sustainable public debt can proceed in an orderly way.

Flexibility, however, can make rules less credible. To be credible, ultimately the Council needs to be free of short-term political meddling. To deal with that problem, Germany, Poland, and Switzerland for instance changed their constitutions. For the United States, we believe that structuring the Council so that its recommended annual deficit number takes effect unless voted down by Congress will be sufficient to break the current log jam.

(c) Jurgen Brauer is Professor of Economics, James M. Hull College of Business, Augusta State University, Augusta, GA. Dick Lepre is a Senior Loan Officer with RPM Mortgage of San Francisco, CA. [Reprint permission granted, provided the text is reproduced in full and the authors' are fully credited.]

 

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Dick Lepre
RPM - SF
1400 Van Ness Avenue
San Francisco, CA 94109
DRE License # 01143973
NMLS Individual ID 302379
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 244-9383
(866) 488-2051 fax

California Department of Real Estate - real estate broker license #01201643

Comments

[James Studley]

Dick,

Makes way to much sense for Congress to agree or the president. But it is another great idea falling on deaf ears; thanks for keeping "hope" alive. Without vision we will certainly perish, keep up the vision for us needing hope that our country survives.

1. We are talking about removing their "power" real or make believe they will never do it.

2. Ego. Imagine their thoughts, "Of course we can figure this out we created it didn't we?"

[Emil Wisekal]

The moment I heard about the recommendations of the commission late last year, I thought "Hey, this could work! They don't leave any stone unturned."

I think that the commission was formed so that people couldn't say "Nobody in government took this seriously". But the Administration and Congress are NOT taking it seriously. Where is the forward motion toward getting this their recommendations turned into law?

I think people like you and me have to raise their voices and demand that action be taken here, and taken now.

[Portfolio Analysis]

There is no doubt that the current recovery is gathering momentum., however fragile it is. The risk going forward is the risk of political battle over raising the debt ceiling could topple the positive sentiment.

http://theintrinsicvalue.com/news-analysis/us-debt-limit-know-unknowns