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July 20, 2011

There Is A Permanent Solution To The Fiscal Issue

July 20, 2011

There Is A Permanent Solution To The Fiscal Issue

The inability of those elected to responsibly set fiscal policy has never been more evident. There is an alternative which I have been pressing for several years. It involves giving the control over the National Debt and deficit to an independent agency which can do what is best for the nation’s economy rather than do whatever they need to do to get reelected. The behavior of politicians in D.C. approximates that of people on the Jerry Springer Show. We can find their dysfunction entertaining but while I can not watch Jerry Springer I cannot choose to be unaffected by the idiocy of politicians.

I am repeating this only because the value of what is suggested here has never been more obvious. This is a joint effort by myself and economist Jurgen Brauer. The underlying thesis is that the polotical process is incompatible with fiscal sustainability. This was coauthored by Jurgen Brauer.

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

The idea that the political process is not compatible with fiscal sustainability has never been more obvious.

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 debt ceiling and 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 a maximum National Debt which is economically sound over the medium to long term. 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 limits 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.

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 and regular contributor to The Basis Point.