J Brauer | © Stone Garden Economics
On 24 October 2005, U.S. President George W. Bush nominated Ben Bernanke—a former Princeton economics professor and the current chair of the President’s Council of Economic Advisers (CEA)—to succeed Alan Greenspan as chair of the Board of Governors of the Federal Reserve System, the country’s central bank. The Fed determines U.S. monetary policy. By influencing the amount of money circulating in the economy, it directly influences interest rates and, with that, inflation, employment levels, and economic growth, similar to the way that Congress and the President use fiscal policy—changes in federal spending and taxation—to influence inflation, employment, and growth as well.
Like Supreme Court justices, the Fed’s seven governors are nominated by the U.S. President and assume office upon confirmation by the U.S. Senate. However, whereas the purview of Supreme Court justices is limited to the U.S., the Fed governors’ influence reaches across the entire globe not only because the U.S. economy is the largest in the world—it constitutes about 20 percent of the world economy—but also because the U.S. dollar is the world’s most desired currency, and protecting the value of the dollar is the Fed’s most important statutory duty. The chair of the Fed is thus the world’s preeminent economic policymaker.
The Fed is an independent federal agency. Unlike their CEA colleagues, Fed governors cannot be fired, much like Supreme Court justices cannot be fired. This guarantees that truth can be spoken to power and that independent action can be taken even if politicians disagree. Keeping the Fed free from political meddling is important because this allows its officers to guide the U.S. economy along economic criteria of long-term wellbeing rather than along lines of short-term political expediency. Other countries have followed suit, and most of the world’s economically successful states now possess independent central banks. This has been to our, and the world’s, good.
Sadly, the same cannot be said about fiscal policy. Congress, in 1946, created the Council of Economic Advisers (CEA), an agency meant to provide objective economic analysis and advice to the President. In fact, its three members are nominated by the President and confirmed by the Senate. But unlike the Fed, the CEA does not possess independent decisionmaking powers over the economic affairs of the nation. Instead, the CEA has become politicized. Increasingly, members—and especially its chair—are appointed on the basis of economic policy opinions that happen to coincide with the views of the President. Rather than providing independent advice, the CEA chair has become a presidential mouthpiece. His role today is either to shut up or to repeat the presidential line. In a recent case, President George W. Bush fired Harvard economics professor Greg Mankiw as CEA chair when the latter made an unguarded public comment that was deemed politically unpalatable.
If advisers can say only what the master wants to hear, then the advice is not particularly useful. Thus, the CEA has become irrelevant as an advisory body on fiscal policy. Independence has been thoroughly domesticated. One sign of this is that Mr. Greenspan, rather than the CEA, is asked to make statements on all areas of economic policy even though the Fed’s chair has no direct influence on government spending and taxation policies whatsoever. Nonetheless, his advice is valued because it is independent and therefore more credible than that of the CEA.
Just as the nation—and the world—treasures an independent Federal Reserve, the nation and the world would treasure an independent Council of Economic Advisers. Just as the nation’s monetary policy has been handed over to the Fed, my proposal is to hand a good dose of the nation’s fiscal policy decisionmaking powers to a revamped CEA. Like Fed governors, CEA members should be appointed for nonrevokable and nonrenewable 14-year terms, and its chair should be its chief spokesperson on fiscal policy. Its powers would include to set an annual federal budget spending limit and to set the nation’s debt limit. (Congress would have power to override the CEA budget limit only in case of a formally declared war against a foreign power.)
By setting an annual budget spending limit, Congress and the President would still need to wrangle over spending and taxing priorities. If in one year it were decided to spend more than is collected in tax revenue, the resulting deficit would add to the nation’s debt. By controlling the national debt limit, the CEA would give the politicians some year-to-year leeway in running the economy—since deficit spending can be economically useful—but would also compel politicians to direct their decisions toward restoration of economic growth so that in another year tax revenue would exceed spending and a prior year’s deficit could be reversed. This would ensure that the federal budget is balanced over the duration of a business cycle and would avert the current practice of unrestrained federal spending and borrowing at the expense of the Social Security Trust Fund and future taxpayers.
The CEA would need to be given additional powers, such as preventing Congress from imposing unfunded mandates on states, or otherwise Congress could easily by-pass any CEA budget limit. I trust that Mr. Bernanke will enjoy his new-found freedom to speak his mind and will not fail to disappoint even the president should the nation’s economic health warrant unpopular monetary policy decisions.
J Brauer is Professor of Economics, James M. Hull College of Business, Augusta State University, Augusta, Georgia, USA.