Case for a Fiscal policy institution on the lines of a central bank/Federal Reserve

Benjamin Cohen argues that fiscal policy should be given to technocrats just like monetary policy.

Central bankers are often heard saying monetary policy is not the only game in town and time for fiscal policy to act and so on. But the problem with fiscal policy is it is politicised. But what is fiscal policy is also in the hands of independent agencies such as central banks? He calls it Fiscal Fed:

But what if fiscal policy was as depoliticized 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 authorized 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.

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