Monday, March 19, 2012

Wren-Lewis and fiscal councils with real powers.

Nice to see Simon Wren-Lewis (economics Prof. at Oxford) toying with the idea of fiscal councils or committees with the same powers that central banks have over monetary policy. I advocated pretty much this idea here. See Wren-Lewis’s final paragraph on p.R4 and next few paragraphs, here.

If monetary policy is taken right out of the hands of politicians and put into the hands of central banks, then why not do the same with fiscal policy? That does NOT MEAN, as Wren-Lewis correctly points out, and as I pointed out, that strictly political decisions should be taken away from politicians or the democratic process. And those political decisions are basically two. First, there is the decision as to what proportion of GDP is allocated to public sector spending, and second there is the decision as to how that money is split as between defence, education, roads, law and order, etc etc.

But the decision as to how much stimulus we get from monetary policy is in the hands of central banks. So why do we leave the decision as to how much stimulus comes from fiscal policy in the hands of non-experts, i.e. politicians? It makes no sense.

And personally, I wouldn’t bother with two committees: one for fiscal and one for monetary. I’d just merge them. That is because with a view to determining the TOTAL stimulus (or “anti-stimulus”), close cooperation would be required between the two committees ANYWAY.

But I know some advocates of Modern Monetary Theory don’t like that arrangement. However I’ll wear them down eventually :-)


P.S. (11.10 am UK time). Another good point made by Wren-Lewis relates to what he calls “deficit bias”. That is the temptation that politicians fall for, namely failing to collect enough tax, and with a view to ingratiating themselves with the electorate. The tax shortfall is made up for by borrowing of course. Today’s politicians are more than happy to leave the resulting mess, i.e. an excessively large national debt for their successors to sort out.

In contrast, a fiscal committee would hopefully borrow just to bring fiscal stimulus where appropriate – not to make anyone popular with the electorate.


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