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Not all macroeconomic tools can be independent

As a follow-up to my long-winded post on fiscal policy, it's worth doing a comparison with monetary policy, the other major macroeconomic lever.

Monetary policy, in the form of interest rates and money-printing, is obviously controlled by an independent authority, the central bank. The effect of this is broadly good - interest rates largely get moved with respect to the state of the money supply, aggregate demand and so on, and not because of loud electoral voices demanding lower mortgage payments. Imagine if the federal government controlled the RBA cash rate, given how much political attention gets paid to mortgage stress and bank-bashing. Would rates ever rise? Instead, the RBA has done a pretty good job of managing rates to maximise demand and output.

So given that fiscal policy is also a tool which can be used to achieve similar things, would it be better managed by an independent body? From a strict economic perspective, the answer is almost definitely yes. A body that could ignore the public's anger about spending cuts and tax rises in a booming economy and deliver a needed surplus - or contrastingly, in deficit-obsessed Australia, about the failure to deliver a surplus in a recession - would be able to use that lever much more effectively than a government always keen to tax less and spend more.

That can't happen, of course, because fiscal policy isn't just an economic tool, which was the main point of my earlier post. It's also the way governments do things: hire people, provide benefits and healthcare, build infrastructure, and so on. Those are things which, as social and/or philosophical questions, should be handled by an accountable, democratic government and not by an untouchable independent institution. Unfortunately there's no clear way to split the dual roles of government budgets, so everything gets left to politicians and as a result we mess up fiscal policy much more frequently and severely than monetary policy.

(As a slight side note, you probably could have said much of this about monetary policy before it became independently controlled. The ability of people to own homes, in particular, could be viewed as something a democratic government should legitimately wield some level of influence over. The extent of the power being handed over, though, is much less when giving up monetary policy as opposed to fiscal. Fiscal policy is literally everything a government does.)

It's tempting to envision some kind of middle ground. Say the government decides what core services it will provide: unemployment benefits, public health, roads, ports and so on. Armed with this list, a fiscal authority sets the taxes to pay for them. As appropriate, it makes other changes. If macro conditions demand a surplus, it collects more taxes than needed. If there's a downturn, it either collects less tax than necessary or outlays for temporary extra spending (the government might help nominate targets for this), and those changes are pared back as conditions return to normal.

This has the appealing advantage of linking government services, apart from the temporary ones, to collected taxes. If voters elect a government promising to spend left right and centre, they will pay for those new services with new taxes - as government service, fundamentally, should work. The path of promising vast new spending regimes and irresponsibly funding them with a deficit, without concern for economic conditions, would no longer be open to politicians.

A feature that could be either a downside or an upside, depending on your perspective, is that government and the population wouldn't have control over the tax mix. This could be good insofar as it avoids a lot of public choice problems which might prevent economically obvious taxes (like a land value tax? or Michael Pascoe's favourite) from being implemented. It could also be bad, because it means decisions about how progressive, flat or regressive your tax code is - questions which are not strictly economic, but have principled aspects - receive no input from government, the populace, or indeed anyone other than hard-headed economists. It also mitigates the ability to use the tax code to incentivise certain types of behaviour, although it's conceivable that you could build a system with a way around that.

These are all potential problems with such a setup, and I'm sure there are plenty more. Perhaps the biggest problem is that this would be so radical a change that it a) could probably never emerge from our political systems and b) is difficult to conceive of and understand (and so praise or critcise) from our lowly position in the status quo.

Note: I should add, the last two posts have basically assumed Keynesian macroeconomics - deficits in downturns, surpluses in booms - as the structure fiscal policy works with. That's because it'd be extremely inconvenient to layer every example with alternatives from other fiscal frameworks, so it's best to choose one and go with it. I used Keynesianism because I basically believe it.

None of this applies narrowly to Keynesian macro, though. As regards the first post, you could have an ideological view on appropriate spending that differed from your economic view, even if your economic view is that there should always be a surplus, or always a deficit, or whatever wacky combination you like. For this post, the independent fiscal authority could work to provide always-balanced-budgets, or boom deficits and recession surpluses, and so on.