Morning Coffee Videocast: Time for a Fiscal Stabilization Board to Deal with the Deficit?

6 min 21 sec - May 13, 2006. Brad DeLong's Morning Coffee. Technocrats--the Federal Reserve--handle our monetary policy. Should we change our system so that technocrats handle our fiscal policy as well?

Time for a Fiscal Stabilization Board to Deal with the Deficit?:

Comments

[anne]

While I can appreciate and share the worry, the idea that fiscal policy should or could be removed from the responsibility of the President and Congress is profoundly undemocratic. The need is for more responsible political leadership, not for subverting the Constitution with a false sense that professional administrators would be somehow more responsive to a complex set of public needs. No matter; the idea is impossible politically :)

[Michael Mullock]

Sorry, an educated electorate would not require any other change.

[Firebug]

Frankly, there are enough problems with the Federal Reserve that we already have. The important decisions in American politics should be made by elected officials, not appointed technocrats. The Fed already more or less openly acts in the interests of the big money men (e.g. jacking up interest rates if the working class gets too uppity), and the last thing we need is to hamstring responsible elected officials on fiscal policy as well. I'd rather go the other way and put monetary policy back under the control of the people, either by making Fed Chairman a publically elected position or by abolishing it and letting Congress handle monetary policy.

[anne]

No; there is no obvious bias to deficit spending or little accountability. A few years ago, we had a bias to a fine budget surplus. These last 25 years however have marked a conservative pushed move from an administrative accountability that was a legacy of Theodore and Franklin Roosevelt, a move that has become especially pronounced in this Administration when even scientific truth has been shunted aside politically.

[Chris]

The problem isn't that "politicians" can't handle the deficit, the problem is that *REPUBLICAN* politicians can't handle the deficit.

That's the problem with having one party that knows how to campaign, but can't govern, and the other party that knows how to govern, but can't campaign. It's like the worst-case scenario of the Prisoner's Dilemma.

[cb]

We don't need a fiscal stabilization board. We need a benevolent social planner who would solve the problem using a really big Bellman equation.

[Dustin]

Brad, this new podcast feature is awesome!!! I'm serious, I could listen to you talk all day. I saw you on C-Span during the Social Security debates and you rocked then too. You blogging rock hard but your podcasting rocks equally hard..or maybe harder.

Anyway, "Morning Coffee" is awesome. Keep doing this.

[NBarnes]

Sympathies about the coffee drought. We're espresso drinkers at my house and there was an emergency 2 am run out to get milk last night so that we'd have lattes in the morning. It was considered a dire emergency.

I'm extremely curious to know what powers you, Brad, would consider giving to a Fiscal Stabilization Board. The Federal Reserve does what it does quite well with its hand on only a single level. Would the FSB have as elegant a method of control?

[bakho]

That is the job of OMB, CEA and CBO. The problem is not technical. The problem is political will.

[anne]

No; fiscal policy whether well or poorly designed is decidedly a task for the Congress and President. We are after all a democracy, not an imagined Platonic administration.

[andres]

anne, mike, though I strongly sympathize with your arguments, I think I'll have to stick my neck out here and defend Brad's proposal.

In an economy where the state only had to provide relatively few goods and services (think 19th century) it would work perfectly well for the electorate to indirectly control fiscal policy through its elected official in the legislature. Today, however, the Federal government controls _huge_ slices of US national income because of its necessary expenditure on defense and infrastructure, not to mention entitlements such as medicare and social security.

By itself that would also not be a problem, but we also have to confront the transformation of the US political system from a quasi-democratic republic to a proto-fascist corporate oligarchy (think Wilhelmine Germany without a _crowned_ head of state). The news media and textbook industries, under the control of a small number of major corporations, do their best to promote a non-activist electorate who are content to passibly vote for the handful of candidates whom they are spoonfed. Even worse, many in the business sector do their best to court religious, xenophobic, and racist elements in the electorate in order to create a political coalition that will be proof against all progressive reform proposals. Hence the modern Republican party, but it could just as easily have happened to the Democrats if Johnson had refused to pass anything resembling a Civil Rights Act.

Under such a political system, it becomes inevitable for the corporate elite to obtain enough control of the Federal government that they will _loot_ the government finances for their own benefit by simultaneously running up high deficits through upper 1%-targeted tax cuts and also transferring the tax burden over to the already indebted middle class. This is what has now happened.

There are two basic solutions to this problem. Either you (a) have an anti-corporate revolution that moves this country back to where it was in the 1960's (in terms of economic policy, _not_ in terms of race relations). Or (b) you take away control of fiscal policy from corporate elites who are interested only in their own short-term benefit and put it in the hands of techocrats who are interested in the long-term stability of the system, even if that system is undemocratic.

The Fed works on a similar model, and while I have no illusions that the people running the Fed want a more egalitarian social democracy, I believe that their preference for long-term financial stability (not to mention bitter experience as in the early 1930's, when monetary policy actually was run for the benefit of only a half-dozen or so large New York banks) prevents monetary policy from being run as irresponsibly as fiscal policy is today.

Consider the following _initial_ suggested fiscal policy reform (needless to say, it would require a great deal of ironing out in order to merit serious scrutiny):

(1) Congress is required by constitutional amendment to pass a budget that is balanced with respect to forecasted tax revenues. i.e., if a Senator wants pork spending to benefit his constituents, he has to pay for it. Also, the Social Security Administration is removed from Congressional control--no more raiding the trust fund.

(2) The U.S. Treasury is removed from the short-term control of both the President and Congress. That is, the Treas. secretary and individual governors may not be removed.

(3) The Treasury is given the ability to unbalance the budget "below the line", so to speak, by either having an additional flat-rate tax on taxable income (as defined by the IRS) above $20,000 if the economy is overheating, or a flat-rate subsidy on all taxable income if the economy needs stimulus.

(4) But as its first priority, the Treasury is given the responsibility of guaranteeing the long-term sustainability of the Federal finances without creating major disruptions in order to do so. i.e., its main responsibility is to maintain the credibility of government bond issues and prevent risk-caused capital flight. e.g., one could require that any "below-the-line" surpluses obtained by the Treasury be used to pay down the Federal debt.

(5) To make sure that the Treasury is not controlled by a narrow set of interests, one could prevent the Secretary from having absolute control by creating a set of governors similar in power to the governors of the Fed, but this time would be selected by state legislatures rather than by banks or any other narrow set of interest. The exact representation that state legislatures would have in the Treasury can vary without substantially changing the nature of control.

(6) If necessary, give the Fed the discretionary ability to remove the Secretary and its governors if and only if the Fed decides by a super-majority vote that it has had to raise interests several times in succession only because of excessively lax fiscal policy by the Treasury at each given time. This would act as a check against the Treasury being controlled by anti-tax wingnuts.

There would of course, be problems with any proposals such as this--I have not studied public economics and am very from an expert on the political economy of taxation, but I think all of the above is a good starting point. Most importantly, I think that in spite of all the political difficulties is is easier to achieve than a return to the days when both major parties were fiscally responsible--I don't believe the current state of politics would permit such a return except in the case of a really hard landing--i.e. collapse of the dollar and/or a major recession-inducing backlash by the Fed.

[anne]

http://www.calvorn.com/gallery/photo.php?photo=6484&u=99|2|...

Baltimore Oriole Bathing
New York City--Central Park, The Ramble.

Well argued, Andres :) I will again think this through carefully.

[MTC]

Dr. DeLong -

Much, much better than the Marketplace comment.

The pacing, inflection and vocabulary are warmer, less didactic. Replacing "everyone making a million dollars a year" with the populist shorthand "every millionaire" may make the assertion less accurate but dispenses with a cartload of obsfucatory verbiage.

However, the two main metaphors are interrupting the narrative, not illuminating it. In terms of rhetoric, the supply siders' being correct once out of four times should have been set against a stopped clock's being right at least twice a day. The cock's believing that its crowing has brought on the dawn should have been the reply to supply siders' defenses of the 2003 tax cut--and nothing else.

You are probably kicking yourself about this, but the inadvertent dropping of the "People's" from the PBOC wasted a juicy opportunity to twist the knife--at least for the benefit of the fraction of the audience born before 1973. A Republican Administration reliant on funding from the Communist Party of China! How about them eternal values?

Oh, yes about "them"...Replacing "trick" with "fool" in the admonition is a wash. The problem with the phrase is the nebulous "them". Warning the people about "them" is appropriate for the ideologue as he/she wishes to keep the people guessing as to who "they" may be. The mild-mannered, reality-based professor can use nouns...and adjectives, where appropriate.

[andres]

Hi Mike. I think of it as sticking my neck out for two particular reasons: (1) the majority of left-of-center political activists and commentators dislike technocracy and think that the Fed system is unrepresentative/undemocratic--a point of view which I sympathize with but do not agree with, and (2) in the past Brad has made any number of arguments which have made me want to wring his not-so-skinny neck, and many commenters here said likewise, so I think of this one case as going against the flow.

With regards to your reply to 2164th, the problems in the electoral system you describe are precisely symptoms of a political system in which a narrow minority, using a single machine political party and news media, has been able to obtain enough power to steal elections.

_But_ there's another hard, bitter question that you need to confront, which is how on earth could a ticket such as Bush/Cheney Republicanism have gotten enough popular support to come within stealing (Supreme Court, computer tally, felon purge, etc) distance of two elections?

The only good reason I can think of is that the public in this country has been systematically lied to and misled for years, both at a very narrow level (Bush's campaign promises and "compassionate conservatism"), but also at a broader level (misreporting by the media and the failure to emphasize hard truths such as Saddam Hussein not having anything to do with 9/11), and at the broadest level of all (systematic distortions of American history and politics, especially with regards to the supposedly benign foreign policy of the US which has _always_ had people like Saddam Hussen as enemies. feh).

If any answer similar to this is the truth, then this country is overdue for serious political reforms needed to prevent another Nixon or Bush administration from ever again running amok. One of these is to decentralize policy-making by reducing the power of of both the President and Congress to f*** up the Federal government's finances, as described above. But that's only a very small start.

[andres]

Err, I did read your reply above, Mike, and I'm not convinced. There are two kinds of plutocrats/corpocrats--those who are interested in robbing the public blind, regardless of the long-term consequences, and those who care about the long-run economic stability of the system (i.e., people like Bob Rubin, Paul Krugman, Larry Summers, and our gracious host). In the past two decades, these two groups have gravitated towards the opposite political parties, though this was not always the case.

Mind you, I do think the latter group are utterly naive utopians in that they cannot conceive of changing the political economic system that elects lying thieves like Bush and Cheney in the first place. Anyway, you can either try to bring down the entire political system that leads to this situation, or you can try to bring about reforms that put the latter group in greater control of economic policy. The second option, I think, has a slightly better chance of becoming a reality.

[Auros]

Wow, that lack of coffee really IS a catastrophe -- you're quite obviously less coherent than usual, stumbling over basic things like expressing the idea of the middle income quintile, getting stuck on the "hemming and hawing" thing repeatedly...