J Brauer and D Lepre | © Stone Garden Economics
The President’s Council of Economic Advisers released its annual report two days ago. Among other conclusions, it finds that “It is essential that the United States follow a fiscal policy that stabilizes the debt-to-GDP ratio at a feasible level.” Similarly, the Congressional Budget Office issues regular warnings about the lack of public finance sustainability. Nor is the United States alone. The European Union is going through contortions to deal with the specter of Greece defaulting on its public debt.
Congress recognizes that the country’s debt path is unsustainable. While the economics of the matter is straightforward – cut spending, raise taxes, or both – the politics is not. But if voters are not going to insist on fiscal sustainability, and if Congress is not going to control public finances on its own accord, then one must conclude that the fiscal process is lacking a necessary ingredient. To supply it, we propose the creation of a Council on Fiscal Sustainability. Under enabling legislation, its members – presumably economists – would be appointed by the president, and confirmed by the senate, to nonrenewable 14-year terms and report to Congress twice a year. This is not a revamped Congressional Budget Office, nor a refurbished Council of Economic Advisers, but an independent agency akin to the Federal Reserve Bank.
The CFS would have a single task: place before Congress an annual maximum budget deficit figure that is economically sound over the medium- to long-term. Suppose that figure is $300 billion. Congress could decide to raise $1.5 trillion in revenue and spend $1.8 trillion, or it could decide to raise $1.8 trillion and spend $2.1 trillion. If Congress did propose to spend $2.1 trillion but could not agree to raise more than $1.5 trillion in revenue, then spending would have to be cut. Every proposed spending increase would be constrained by the need to raise taxes, and every proposed tax cut would be constrained by the need to bring down spending.
The enabling legislation must mandate that the deficit limit presented to Congress be accepted unless it is voted down by a resolution of disapproval. There is precedent: the Base Realignment and Closure (BRAC) process regarding military base closures is an example whereby a “this takes effect unless you vote to disapprove” process helped achieve the desired goal in a manner that was politically acceptable.
Creation of the CFS gives each member of Congress a new degree of political freedom. “You folks needed those roads, and under the CFS deficit limit, taxes had to increase to pay for them.” Or, “I voted to limit spending because, under the CFS deficit limit, the alternative would have been to raise your taxes.”
We know from the experience of the very many countries – 80 nations as of 2009 – that have introduced so-called fiscal rules that two issues are key: the rule needs to be credible, and it needs to be flexible. For instance, the United Kingdom put its fiscal rule in abeyance when it found that it was not sufficiently flexible to deal with the current extraordinary economic environment. Thus, writing legislation to set up the council will need to address budgetary eventualities – pre-commitments of when it is, and is not, permissible to breach annual deficit limits. It would also have to come with phase-in provisions, such as those passed in Germany last year so that the transition from unsustainable to sustainable public debt can proceed in an orderly way.
Flexibility, however, can make rules less credible. To be credible, ultimately the council needs to be free of short-term political meddling. To deal with that problem, Germany, Poland, and Switzerland for instance changed their constitutions. For the United States, we believe, that structuring the council along the idea of an up or down vote on the council’s recommended annual deficit number might just break the current log jam.
J Brauer is Professor of Economics, James M. Hull College of Business, Augusta State University, Augusta, Georgia, USA. D Lepre is a Senior Loan Officer with RPM Mortgage of San Francisco, California, USA.