Thursday, 29 September 2016

Our crazy fiscal / monetary decision making process.

With central banks almost out of ammunition or at least out of conventional ammunition (i.e. interest rate cuts) it has become increasingly clear that more fiscal stimulus might be an idea. But the people who actually decide whether to increase fiscal stimulus (i.e. the deficit) are a collection of economically illiterate squabbling children sometimes known as “politicians”. To put it politely, that doesn’t make much sense.

So why not remove that decision from politicians and put it in the hands of professional economists, based say at the central bank? Of course economists are nowhere near perfect, but they cannot help being better than politicians. If you want medical advice, you go to a doctor, not a politician. That’s not because doctors are perfect, but because they know more about medicine than politicians.

Now the obvious objection to taking the above deficit decision away from politicians idea is that it is undemocratic: a decision is being taken away from democratically elected politicians. But actually that’s not true. Reason is that politicians don’t have the final say on the size of a stimulus package anyway. And that’s because an independent central bank can always overrule what it regards as too much fiscal stimulus by raising interest rates. 

The conclusion so far is that economists, not politicians should decide the size of the deficit.

Now there might seem to be another problem there, namely that if economists decide how big the deficit is to be, they inevitably then influence decisions which clearly are political, like what percentage of GDP to allocate to public spending or how that is split between education, law enforcement and so on.

Well that alleged problem is actually a complete and total non-problem. I’ll illustrate.

Suppose public spending is 40% of GDP and there is no deficit. Economists then decide that a recession has started, and hence that a deficit equal to 5% of GDP is needed. Economists at the central bank would then say to politicians, “You can borrow and spend more (and/or cut taxes) and to the tune of 5% of GDP. As to whether that extra spending (net of tax) comes mainly in the form of more public spending or reduced tax, that’s entirely up to you. Also the question as to exactly which forms of public spending are expanded or which taxes are reduced, that again is entirely up to you.”

Conclusion: the size of the deficit should be decided by economists, not politicians and in doing that, there is no loss of democracy – apart from the “democratic right” of politicians to make a total pig’s ear of running the economy.


Stop press (a few hours after putting the above online): I see a Nobel laureate economist supports the above idea. See Bloomberg article entitled "A Nobel Winner's Radical Proposal to Solve the Euro Area's Woes".


1 comment:

  1. A Postivemoney proposal too.

    There has been a distinct lack of democracy for most of history,this would in my opinion be as important as the abolishment of rotten boroughs in (Reform Act 1832).Only this would abolish rotten financial decisions.


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