Time for a Fiscal Stabilization Board? Perhaps Not.
Brad DeLong asks, over his morning Diet Pepsi, if it is time to create a fiscal stabilization board to control government spending in the way that the Federal Reserve controls monetary policy.
His argument is simple and practical. He argues that politicians, for the most part, have proven themselves incapable of addressing the problem. He also lays out his argument that a balanced budget amendment is not the solution– there are legitimate reasons to run deficits, i.e. for fiscal stimulus and during wartime, but to provide the flexibility to do so without the amendment losing its force is nearly impossible. Thus, the need for independent oversight. I’ll let you watch for yourself.
I’ll admit, I find the idea attractive. At the same time, though, I don’t see how it could ever be enacted, nor am I certain that a fiscal stabilization board could remain independent of the political process to the degree necessary. It’s an attractive idea because, at least in theory, an FSB could, as an independent body, impose fiscal discipline that is lacking in Congress.When we consider why this is, though, the problems with creating an FSB become clear.For an FSB to perform as we desire, it would have to be competent, free from political intervention, and able to overrule the Congress.
To ensure its competence, the officials responsible for FSB decisions would have to be vetted and approved somehow– either through a public vote, the decision of a private body, or the traditional method, Senate approval. A public vote, while free from direct political intervention, would still be subject to political influences. Moreover, if the public were sufficiently educated about fiscal policy to be making such a decision, the appropriate pressure would have already been brought to bear on elected officials, and we would not be entertaining the notion of an FSB. The choice being handled by a private body may be the secret fantasy of some economists, but even if the public would accept the infinite wisdom of the American Economic Association (or a similar body), removing all power from the hands of the people and their representatives is incompatible with the American system. The alternatives aren’t good, and thus, we would most likely have to use the method we use for most other positions, Senate approval. It works for the Fed (contrary to what some of the more conspiratorial responses to DeLong’s post imply), why not for an FSB?
Because while the economic power wielded by the Fed is similar to what an FSB would have, an FSB would have, at all times, far greater near-term political import than the Fed.
To understand why, we must return for a moment to the fact that the FSB, to be effective, must be able to overrule the Congress. An FSB would be ineffective if it could be overruled by even a supermajority. The implicit belief, often invoked by politicians, that a bipartisan consensus lends legitimacy to a decision is incorrect. Politician’s interests are only those of their constituents to the extent that they are held accountable by their constituents. Consider New Jersey’s attempt to repair the redistricting process, as described in Slate:
New Jersey has made the boldest effort. It has a redistricting plan that seems perfect on paper but turns out to suffer from an unanticipated fatal flaw. The Garden State has a bipartisan redistricting commission equally divided between the two parties. It is chaired by an impartial tiebreaker-historically, a professor from Rutgers or Princeton University. Each party drafts its own map. Whichever map wins a majority is approved. Both parties thus have an incentive to court the tiebreaking chairman, encouraging them to draw a map that reflects the state’s true political leanings.
But the New Jersey process has a loophole: If the two parties collude they can draw a map that protects all the incumbents and outvote the tiebreaker. That’s what happened after the 2000 census. The GOP wanted to protect its six incumbents, while Democrats wanted to protect their seven seats. The two parties came up with their incumbent-protection plan and outvoted the tiebreaker, Rutgers University political science professor Allen Rosenthal. It was a bipartisan solution to be sure, but one that protected politicians’ interests rather than voters’.
Incumbents have a shared desire to remain in office, and they are willing to work together to guarantee their job security. Voters, for their part, don’t get angry about paying lower taxes or about pork coming in to their own district. They like fiscal responsibility, but only in the abstract– only in the way that a six-year-old doesn’t want mommy and daddy to go bankrupt, but still wants more toys. Thus, if a majority vote were enough to overrule the FSB, such a vote would become as cursory as each time the House raises the debt limit. Even if a supermajority were required, it would empower the minority party, but there’s little doubt that a compromise could be reached. Thus, the FSB must have the absolute power to set spending limits.
How, though, would it deal with taxation? Clearly, spending is only half the equation of fiscal responsibility. Pork is a problem, but so are irresponsible tax cuts. To give the FSB the authority to approve or deny individual changes to the tax code would be an unacceptable subversion of the will of the Congress. Granting the FSB only the authority to address spending without addressing taxation would leave the FSB open to two dangers: the “starve the beast” approach wherein tax cuts are used to force down spending and create cuts to popular, successful programs; and the opposite, wherein taxes are raised to finance every Congressman’s pet project. The only other approach would be to allow the FSB to set target taxation levels and require the Congress to meet them– the problems with making such an approach result in anything other than a potentially dangerous power struggle should be obvious.
Under any of these scenarios, the FSB’s power is enormous, and we can see how it could easily control the political landscape. Imagine, for example, that the FSB were created today, and its members selected by the Republican party. It could then comply with the current regime of irresponsible spending, only tightening Congress’ constraints when Democrats took control. If the Democrats had the ability to remove FSB members, it would certainly correct this problem, but it would create a compliant and ineffective FSB. The same problem does not exist with the Fed because while the Fed has the power to affect the economy, its mechanisms act more slowly and consist of a relationship wherein the Fed may or may not accomodate Congress– not one wherein the Fed may directly constrain Congress. As a result of the political import of an FSB, it’s unrealistic to expect that Congress would hand over power to one, let alone to do so without hopes of manipulating it.
Thus, what we have is a situation in which the economics of the situation indicate that a Fiscal Spending Board might be a good idea, but the political economy of the situation shows us that it would be impossible to create the body that we would need. I’m unable to suggest any better short-term solutions; however, in the long term, improving economic literacy among the electorate could help foster the understanding necessary to improve our handling of fiscal policy.