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Wednesday, September 14, 2011

Rodrik: The Crisis of Fiscal Imagination

Dani Rodrik:

The Crisis of Fiscal Imagination, by Dani Rodrik, Commentary, Project Syndicate: ...Democracies are notoriously bad at producing credible bargains that require political commitments over the medium term. In both the United States and Europe, the costs of of this constraint on policy has amplified the crisis – and obscured the way out. ... As sensible as [a] two-pronged approach – spend now, cut later – may be, it is made virtually impossible by the absence of any mechanism whereby President Barack Obama can credibly commit himself or future administrations to fiscal tightening. ...
Democracies often deal with the problem of extracting commitments from future politicians by delegating decision-making to quasi-independent bodies managed by officials who are insulated from day-to-day politics. Independent central banks are the archetypal example..., politicians effectively tie their own hands (and get lower inflation as a result). ...
Compared to monetary policy, fiscal policy is infinitely more complex, involving many more trade-offs among competing interests. So an independent fiscal authority modeled along the lines of an independent central bank is neither feasible nor desirable. But certain fiscal decisions, and most critically the level of the fiscal deficit, can be delegated to an independent board.
Such a board would fix the maximum difference between public spending and revenue in light of the economic cycle and debt levels, while leaving the overall size of the public sector, its composition, and tax rates to be resolved through political debate. Establishing such a board in the US would do much to restore sanity to the country’s fiscal-policymaking. ...

The we'll need something like this:

Supervising the supervisors, by Pedro da Costa: A new Brookings Institution report from the self-appointed Committee on International Economic Policy and Reform suggests that, given a spotty recent record, supervisors and policymakers at the world’s top central banks need to be watched themselves. The group of 16 high-profile economists and financial experts, which includes former Brazilian central bank chief Arminio Fraga, Berkeley professor Barry Eichengreen, Harvard’s Kenneth Rogoff and Mohamed El-Erian from Pimco, proposes a new international watchdog that might ensure actions taken by individual countries are coordinated and smoothed out...

The Brookings report suggested the Fed’s go-it-alone approach can be self-defeating... The panel urges explicit international coordination — however politically unfeasible. ...

Best of luck, ladies and gentlemen.

    Posted by on Wednesday, September 14, 2011 at 03:06 PM in Economics, Fiscal Policy, Politics | Permalink  Comments (9)


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