Independent Courts, Independent Monetary Policy, why not Independent Fiscal Policy?

The US Supreme Court is independent from political influence.

The US Supreme Court is independent from political influence.

While always closely observed, rarely have landmark court cases been so politicized as the two gay marriage cases that went before the Supreme Court this week. You’ve probably noticed new profile pictures on Facebook and Twitter, timed apparently with the hope of swaying the court. Almost daily, another public figure expresses support for gay marriage. Most significantly, Pres. Obama has given his opinion on both cases, and has taken the unprecedented step of directing the Department of Justice not to defend DOMA in court.

The political nature of these court cases raises questions of how “independent” the US judicial system is. As a matter of law and tradition, courts in the US are not to be subject to undue political or partisan influence. This makes sense–if courts were not independent, then the role of the judiciary in “checking” the other branches of government would be undone. Judges might become extensions of the political system, appointed and paid only to justify their own party’s political positions.

Monetary independence is perhaps as important as judicial independence. Monetary policy concerns questions of the amount of money in the economy and is normally set by a central bank, over which the government may or may not have influence. Historically, governments with influence over monetary policy tend to show a very strong inflation bias, that is, they tend to favor increasing the money supply more than would be ideal, causing high long-run inflation (rises in prices of goods) and arguably worsening recessions. Put simply, they do this because expansions of money tend to benefit the government in power.

For this reason, the Federal Reserve, which sets monetary policy in the US, is independent from the government by law. Evidence shows that central bank independence really does go along with lower inflation, as in this data from the St. Louis Federal Reserve:

Long term inflation tends to be lower where central banks are more independent.

Long-term inflation tends to be lower in countries where central banks are more independent.

But while monetary policy is stable, fiscal policy in the US is messy. Fiscal policy concerns questions of taxes and spending. Currently, fiscal responsibility is shared by Congress and the President.

For years, the government has ignored experts who called for less drastic tax cuts, structural entitlement reform, and slower spending growth. Political self-interest has seemed to be responsible for such short-sighted policy. Tax cuts and new spending programs can always be sold to the public for votes, as can oversized stimulus spending, inefficient entitlement programs (Social Security and Medicare), and expansions to unemployment benefits. As a result, the US suffers from more debt, higher unemployment and lower economic growth rates than it otherwise would.

How could the US de-politicize taxes, spending and debt? While it would be very unpopular in Congress, there might be benefits to independent fiscal policy. This might work by giving an existing agency, like the expert-run Congressional Budget Office, independence and power to set mandatory long-run levels of tax revenue and spending, with the mandate to promote long-term economic prosperity. Congress could then decide which taxes to use to collect revenue and how to spend the money assigned to its authority. Perhaps the CBO might even have power to set specific tax rates or restrict spending in particular government programs.

If this agency had existed a few months ago, the government might have avoided the fiscal cliff as well as the sequester. An independent fiscal agency could also coordinate with the Federal Reserve. For example, during a recession, the Federal Reserve could engage in monetary expansion with the guarantee that the fiscal agency would not allow ineffective fiscal expansion. An independent fiscal agency would also be free from the influence of special interests that burdens Congress.

The main objection to this proposal would be that it removes accountability. (Similarly, people like Ron Paul are misguidedly arguing that the Federal Reserve should be more accountable to Congress.) But Congress has a terrible track record on fiscal issues. Fiscal independence would not involve a loss in accountability–on the contrary, Congress would be held accountable not only to donations or votes, but to the interests of the long run prosperity of the country.

One thought on “Independent Courts, Independent Monetary Policy, why not Independent Fiscal Policy?

  1. If fiscal policy was independent, it will mean that some organisation/institution can just dip into taxpayers pockets and take whatever they want and spend it on what they think is right. This will mean that governments are no longer needed to represent people’s views on a diverse range of issue, because the whole democratic process is about coming to compromises on how much to tax and what policies to implement and how to spend the money.

    Simply put if there was fiscal independence there will be no need for governments and states.

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