The case for more independent fiscal policy has always struck me as bleedingly obvious. I still think it is kind of inevitable but we’re certainly taking our time. The adventures of the last decade both here and in most other developed countries are a nice illustration of why it’s necessary. It was touch and go in many countries whether a fiscal stimulus would be pursued while the financial sector melted down and monetary policy sat in a liquidity trap. But a fiscal stimulus helped make things less disastrous than they would otherwise have been. But now the architects of those policies, each in their way being quite politically bold in implementing those policies, are now gone (Gordon Brown) or mired in populist rhetoric about how spendthrift they are and how urgent it is to rein in spending (Barack Obama).
Meanwhile in their countries, Krugman and others with a bit of Keynesian sense point out that the market doesn’t look like driving bond yields up any time soon. And since growth is still dangerously weak, now is no time to pull back on the stimulus. (I’m not addressing these comments to the Australian situation where we’re obviously much further from any bond market concern about the government’s debt position and we look like we’re returning to economic health, though I’m a great believer in my own and everyone else’s ignorance on that score). Krugman has bemoaned the way in which this madness is taking over his own country. But, as Clive Crook points out, that’s not really good enough. There is an issue for the US particularly, which is that if your political system seems inured to irresponsible deficit budgeting, that ultimately removes a lot of your discretion to engage in fiscal stimulus. We hear plenty of complaining from Krugman about the fact of the US’s irresponsibility on this (it’s related to the revolutionary irresponsibility of its Republican Party). But if that’s the case why should we be so sanguine about continuing to push up US debt.
I think Krugman is correct to argue against “fiscal austerity now now now”, especially for the US. But Galston’s view, as I say, is consistent with this. It’s the long-term outlook they disagree about. I don’t understand why Krugman won’t more fully acknowledge the long-term problem. Why not give equal emphasis to the need for further short-term stimulus combined with tax increases and/or spending cuts later? Difficult to do, of course, but what is the objection in principle?
Perhaps Krugman believes that yielding ground on the long-term problem would weaken the case for stimulus now now now. If so, as a matter of political judgment, he is wrong. His blunt refusal to engage with the other side undermines his case. Or does he think there really is no long-term problem? Again and again he says that financial markets are not (yet) pushing US long-term rates higher, as though that is all you need to know. This would be an even weirder thing for him, of all people, to think. Markets know best? Sounds like those looney-tunes in Chicago.
Crook doesn’t finish this piece of analysis. It’s quite simple, unless you have credibility you can’t get far with stimulatory fiscal policy. And, given the difficulty with which the electorate are able to understand the arguments about the appropriate fiscal stance, not to mention the crudity of its options (vote for one of two major paries once every four or so years), institution building seems the only way out.
So why don’t we talk more about it. On the bright side the British Conservatives have made the right move with their Office of Budget Responsibility, though it’s unclear how much it will be able to take a position on the appropriateness of fiscal policy – as opposed to scrutinising forecasts. Anyway, the case to move fiscal policy further towards the model we have now arrived at for monetary policy seems overwhelming.
So far lots of countries have toyed with fiscal transparency bodies, but, as I’ve argued previously, it’s not an absence of basic fiscal transparency that allowed Reagan or Bush II to be as irresponsible as they were. So at a minimum if we’re to get anywhere, we need some independent but official source of public advice to the government – and some similarly official, public and independent comment on how well it’s going. Ideally we’d develop out of this some backstop way in which taxes could be changed across the board to deliver appropriate fiscal policy, with the government always free to deliver the requisite policy in some other way. Then again it took many decades to deliver some semblance of independence to monetary policy, so I guess we’re not making such bad progress . . .