Central banks are the "only game in town," maintaining ultra-low interest rates in the absence of counter-cyclical fiscal policies. A new approach to macroeconomic management is needed

Central banks are the "only game in town," maintaining ultra-low interest rates in the absence of counter-cyclical fiscal policies. A new approach to macroeconomic management is needed

Like storm clouds on the horizon, signs of a global economic slowdown are gathering ominously. In the United States, the sugar high generated by President Donald Trump’s massive 2017 tax cut has peaked and is now rapidly waning, without triggering the promised investment boom.

In Europe, the ongoing Brexit farce threatens severe economic disruption, even chaos, if the United Kingdom cannot conclude a deal with the European Union before withdrawing from the bloc at the end of October.

And in China, growth is unmistakably slowing.

Lurking behind all these problems is the “Tariff Man’s” trade war, which has led economists to worry about a recession as early as next year.

Ordinarily, governments facing an economic downturn would look first to monetary policy, relying on central banks to force down interest rates in the hope of encouraging more borrowing and spending. Yet the tools that monetary policymakers have long deployed to stabilize markets no longer seem up to the task. The time has come to consider a new approach to macroeconomic management.

A decade ago, global interest rates were lowered dramatically to stave off the threat of Great Depression II. But, 11 years after the financial crisis, rates still have not bounced back. In all advanced economies, they remain at historically low levels – and in the case of Switzerland, the eurozone, and Japan, they are below zero. This means that the major central banks will have little to no room for new cuts when they would normally rely on them.

Central bankers have thus begun to call on fiscal policymakers to do more. As US Federal Reserve Chair Jerome Powell recently put it, “It’s not good to have monetary policy be the main game in town, let alone the only game in town.” In practice, a greater role for fiscal policy would mean that tax cuts and spending increases would accompany interest-rate reductions in the event of another downturn.

But there is a problem with this approach: politics. Whereas most central banks are formally independent, and thus are not obliged to take direct orders from elected officials, those in charge of fiscal policy enjoy no such luxury. Budgets are made by politicians, who have no choice but to worry about their prospects for re-election. How can they justify deficit-financed spending that would add to the public debt? Won’t they be tarred as irresponsible, or worse?

Most experts now agree that former US President Barack Obama’s 2009 stimulus program played a vital role in the post-2008 recovery. Still, it cost the Democrats dearly in the 2010 midterm congressional election. Should expansive fiscal policy be needed again, elected officials will be wary of the potential backlash.

But what if fiscal policy was as depoliticised as monetary policy? An autonomous public agency with a defined range of fiscal-policymaking powers would be free to respond proactively to fluctuations in the economy. Like an independent central bank, a “fiscal Fed” could be staffed with politically disinterested professionals operating within limits established by statute. Ultimately, it would still be fully accountable to elected officials, but it would be able to make crucial budget decisions much faster than what is possible today.

To be sure, there would be little room for a new delegated authority to appropriate additional funds. After all, most of the expenditure side of the budget is nondiscretionary or relatively “sticky,” and thus difficult to start or stop on short notice. On the revenue side, however, a fiscal Fed could accomplish quite a lot through the levers of taxes and transfers. Its overarching objective would be to vary tax-withholding rates and transfer payments at the margin as needed, much as what central banks do with interest rates.

In creating such an agency, the political authorities would set basic goals and parameters, and elected officials would exercise active oversight on a continuing basis, to ensure responsible behavior. But within its statutory limits, the agency would be authorised to implement timely adjustments to the government’s revenues in response to changing economic conditions.

The scope of potential adjustments could be agreed in advance as part of the annual budget process, leaving the fiscal Fed with sole authority to determine the magnitude and timing of specific changes. Alternatively, the agency could be granted greater latitude to make such decisions on its own, provided the legislature does not issue a veto within a specified time period. At any rate, there are many ways to reconcile democratic accountability with depoliticized policymaking.

Needless to say, the same kind of objections that apply to central-bank independence would be made against a fiscal Fed. But there is nothing unusual about representative governments delegating key areas of policymaking to professionals. There are always tradeoffs between democratic prerogative and technocratic necessity, and different countries draw different lines between the two domains.

In the US, no one questions the legitimacy of independent agencies like the Securities and Exchange Commission or the Food and Drug Administration. There is no reason why an autonomous fiscal agency could not operate in a similar fashion. As long as its mandate is carefully circumscribed and its operations closely monitored, a fiscal Fed is an idea worth considering.


Benjamin J. Cohen is Professor of International Political Economy at the University of California, Santa Barbara, and is the author of Currency Power: Understanding Monetary Rivalry. Copyright: Project Syndicate, 2019, and published here with permission.

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A step towards the abba lerner functional finance view of fiscal policy that mmt advocates. Without of course mentioning mmt cause you know that'd be voodoo economics.
But in the interests of democracy let the fiscal fed crunch the numbers about the appropriate deficit spend but then let democracy decide where it is spent and to whom.

You want to fix the economy? The issue is on the demand side. QE for the people. Enough with the stimulus for the rich.

Exactly:

QE has been a total failure for the average person worldwide, but nowhere more so than in Europe. Incredibly, 1.5 years after it became official, PressTV and I remain one of the very few people to write about the statistical reality of Europe’s “Lost Decade”. I saw it happening in painful slow-motion, being PressTV’s chief correspondent in Paris.

The reason the Mainstream Media doesn’t want to talk about the failure of QE to provide broad economic growth is because their pro-capitalist media are owned by the same billionaires who get all the profit from QE.

The printing of trillions of paper money (which are certainly not backed by trillions in newly-mined gold) has, just like the oil-produced fruits of the petrodollar, gone to remake the same asset bubbles which sparked the Great Recession.

Once again, only the wealthy are profiting from shady capitalist practices: Housing Bubble II, new stock market records despite the endemic failure of the “real-economy” (evidenced by the Lost Decade), and absurd records in the prices of absurd luxury goods like MBS’ purchase of a da Vinci painting – this has all been paid for by the neoliberal-neoimperialist policy of QE which has failed the average Western citizen and continued the economic misery of the developing world.

But QE has proven one thing: governments are the most powerful forces in society, not bankers. This is something which socialist-inspired democracies are based on, but which only the 1% appear to take advantage of in Western liberal democracies.

Lagarde moving from the IMF to ECB would have been thought of as a step down pre-QE, mainly because nobody imagined that the head of the ECB could create several trillions of dollars simply by tapping a keyboard, as her predecessor Mario Draghi did. The IMF has a lot of money, but they do not have the power to create money. Link

Moreover:

ECB hires ex-Goldman Sachs banker as watchdog

In my mind any country in deficit (which is almost all of them) is being fiscally expansive. The real problem is that governments (excluding NZ) don’t want to pay back their debts in the good times. They are effectively being fiscally expansive at all times and that isn’t viable.

Yep, bang on. NZ Inc is in full employment with record low interest rates. Now is the time to be moderately fiscally conservative. If the sh/t does hit the fan with a global recession we need to have enough powder dry to undertake significant infrastructure spending without it throwing our govt debt figures through the roof.

Ours is a small country dependent on Tourism, Agriculture / Dairy & logging. We need to remember that when we look at our budgeting plans.

A government sector in surplus is a private sector in deficit. Given a foreign sector in surplus too it means your growth strategy is ever increasing private domestic sector debt. The latter being unsustainable. Keeping government powder dry may well mean sucking income out of the economy to the point where debt default sets in or private consumption takes a hit. This then pushes the government into deficit as unemployment kicks in. Self defeating.

Maybe true 50 years ago. These days the private sector spends most of its money or debt on assets.
Pretty sure that’s where Nationals tax cuts went when they where first elected. Government would have been better off to invest that money in infrastructure instead.

NZ is being just that though. I dont agree on "keeping powder dry" if it keeps the country's economy weak. You need to build up the economy and ppls confidence (especially this) such that a downturn is more unlikely. If there is a downturn the "dry powder" is unlikely to be big enough to make much difference anyway.

Trumps tax cuts had the expected outcome: a one off boost to GDP which will be following by years of government deficits, lower government spending, huge government debt and a significantly worse economy. Personally I think tax cuts should only be made by a government which is in surplus.

Agree. Taking away the power of central banks to set interest rates is the closest thing to a silver bullet for fixing whats ailed all markets since the GFC. Just dont give that power to parliament.

Watch the unfolding events in the Straight of Hormuz, as a trigger....

https://www.youtube.com/watch?v=saWpvklgO0s