by Dick Lepre & Jurgen Brauer
The following piece started as something I did suggesting that some of the fiscal policy power wielded by Congress and the Administration would be better handled by the Federal Reserve. I sent it to several folks and the general comment was "interesting idea but no one will go along with the Fed having that much power."
In researching this topic I connected with Jurgen Brauer. Jurgen is Professor of Economics at Augusta State University. He can best be reached via his web site www.aug.edu/~sbajmb, where a monthly economics column may also be found. The result is the following coauthored piece.
Two current events highlight the poor state of fiscal policy in the U.S. The President has proposed a budget and the effect is similar to the dropping of the puck at the start of a hockey game. Is this really the way to conduct fiscal policy in a manner conducive to the health of the U.S. economy? Why do we have so much trouble with fiscal policy and so little trouble with monetary policy?
Contemporaneously, as Ben Bernanke takes over the post of Fed Chairman, attention is directed to asking, "Can he do the job?" That is a fair-enough question but in light of the Fed's generally superb monetary policy performance over the last twenty years it misses the real source of current macroeconomic problems in the U.S.: the federal government's not-so-stellar fiscal policy performance. By contrast, the effectiveness of the Fed in monetary policy is barely a question.
Monetary policy involves the tweaking of interest rates to achieve macroeconomic objectives. The Fed does this with near complete independence from the rest of government. Monetary policy - here and abroad - has been well-served by keeping politicians out of the loop. In contrast, fiscal policy is an intensely political process, involving federal taxing and spending, incessant haggling between the Administration and Congress, and the now fairly distant possibility of an occasional electoral correction.
The present fiscal policy process does not serve the public well. Used as a tool for short-run macroeconomic management, fiscal policy has become a plaything of politicians to curry favor with special interest groups. Poor fiscal policy has been offset only by the ability of the monetary authority - the Federal Reserve - to adeptly conjure monetary policy solutions to fiscal policy mistakes. It is time to give the monetary authority a fiscal authority counterpart. The current Council of Economic Advisers, an advisory body for the President, should be disbanded and a new entity - the Council of Fiscal Authority (CFA) - should be constituted.
As is the case for the Fed now, CFA governors would be appointed to non-renewable 14-year terms, report twice a year to Congress on the state of the economy, and possess certain decision-making powers with real bite. In particular, the CFA would have the authority to influence fiscal policy by specifying economy-wide average personal and corporate tax rates. The CFA would not specify marginal rates, would not dole out tax exemptions, and would not speak to tax reform, would not - in a word - be caught up in administrative and tax-burden distribution issues that are properly the domain of elected representatives. Congress would still need to fulfill its constitutional duty to "lay and collect" taxes, only that the average rate would be set by a disinterested outside party, the CFA.
This average rate would be set so as to compel Congress to attend to its spending habit with more care than it has in recent years. If Congress "overspends," driving federal budget deficits and national debt beyond economically acceptable limits, the CFA could raise the average tax rate, obliging Congress to accept the consequences of its profligacy. Politicians fond of pork would be encouraging taxation, sure to result in considerable political discomfort. The ideal is that the existence of the CFA would induce fiscal responsibility in those who are elected.
Our scheme is not a one-way street. If the CFA felt that the average tax rate were too high or that the economy would do better in the long-run with a year or two of deficits then it could dictate a lower average tax rate. The key is to take an important portion of fiscal policy management out of the hands of politicians. For example, for fiscal year 2004, federal government receipts were 16.03 percent of GDP, whereas federal outlays amounted to 19.54 percent of GDP. Under our scheme, the CFA could mandate Congress to raise the average tax rate to result in tax collections equal to 17, 19, 20, or an even higher percentage of GDP. Presumably, Congress would rather cut spending than to be compelled to "lay and collect" more taxes. In turn, boundaries should be set to prevent the CFA from setting an average tax rate that deviates by more
than, say, two percentage points from spending levels. The only exception to the CFA's tax-regulation powers would be a declaration of war by Congress when dealing with an emergency involving a foreign power. (The CFA would also have the authority to forbid Congress to impose unfunded mandates on state or local governments or to impose taxes under any euphemistic name such as "user fees.")
Our proposal will strike some readers as fancy. Why would Congress give up certain fiscal powers? One answer is that Congress already has delegated numerous important powers - including monetary policy - to certain federal agencies, jobs they are better suited to take on. Thus, Congress created the ICC, FCC, FDA and, regarding its constitutional charter to "lay and collect" taxes, created the IRS to collect the taxes. Creating an agency to set the tax rates is no more an abrogation of its authority and responsibility than is the existence of the IRS.
In creating a CFA, we need to mirror what works with the Fed: real power, terms spanning several administrations, and a "non-dismissal of governors" rule. In time, the CFA might be given other useful powers such as setting budgeting and accounting rules for the federal government that mirror more stringent private-industry practice, especially those that track obligations coming due in future. But the foremost need today is simply to get fiscal policy out of politicians' hands back into the realm of macroeconomic policymaking proper. The CFA would help do that. In short: let politicians do the spending but let another entity provide fiscal "checks and balances" by having final authority over taxation.
If you have something to add to this discussion please post a comment on the blog. Also make a visit to Jurgen's site.