Establishing a “Fisc” – Building Counter-Cyclical Government

In Budget Politics, Economic Planning, Economics, Full Employment, History and Politics, New Deal, Political Ideology, Politics of Policy, Progressivism, Public Policy, Public Works, Social Democracy, Welfare State on August 11, 2009 at 11:29 am


In my previous posts about the need for a People’s Bank and my series on democratic planning, one of the things that has been at the forefront of my mind is not merely how do we pass legislation that advances progressive aims, but how to create institutions that will make advancing progressive aims a normal part of government operations. A good example of this is the economic stimulus bill. Think about how absolutely vital that bill was, and how difficult it was to get it right – the slowness of the process, the huge number of concessions that had to be made that ended up shrinking the bill far below what it should have been, the way that the Senate’s moderate caucus was able to hold up the bill and make it substantively worse (especially in regards to state government spending on education, for example).

What we need is an institution that will both streamline the process of passing economic stimulus legislation, and that will establish the kinds of “automatic stabilizers” that we should have but don’t. There is no reason why Keynesian stimulus should have to take two years to come fully into effect, for example. But most of all, we need such an institution because in addition to initially fending off a recession (as we seem to have done), we need some way of avoiding a 1937 scenario, whereby a government over-eager to return to the orthodoxies of balanced budgets short-circuits a recovery and sends us back into a recession – a scenario that could well happen in the next year.


In my post yesterday about democratic planning, I talked about Otis Graham, John Jeffries, and Barry Karl’s theory about a “Third New Deal” focused on reforming the state to build capacity for economic planning. One of the ideas of the Keynesian intellectuals who were the driving force within the Roosevelt Administration for a “Third New Deal” was to establish a “Fisc” to parallel the Fed. As economists basking in the heady glow of the explosion of John Meynard Keynes’ General Theory, these thinkers believed strongly in the power of independent, expert-driven government institutions to guide the economy, and looked to the Fed as an early experiment that had yielded useful results (although they often disapproved of the Fed’s monetary conservativism).

The role of a Federal Fiscal “Reserve”, in their imaginations, would be to create the machinery for implementing Keynesian economic policy that didn’t depend ont he vagaries of the appropriations process; after all, Congressional priorities often shifted Federal resources to politically important districts, rather than areas most in need of economic stimulus, and politicians who thrived on the power of doling out money in their districts were often loathe to cut spending when the economy threatened to over-heat.

Furthermore, they believed that establishing an institution that could balance the Federal Reserve would prevent the Federal government from having its fiscal policy and monetary policy be at odds – as was the case, especially early in the New Deal, when the Fed kept to its anti-inflation policy at a time when the Federal government was trying to expand the economy. This would also hopefully also make the Fed more responsive to the policy platform of elected governments.

So why not revisit this idea today?

Establishing A Fisc:

The idea here would be to establish a new Federal agency, the Office of Fiscal Policy (OFP), that would operate out of the Executive Office of the President, charged with the oversight, coordination, and policy development of the overall fiscal posture and policy of the government (as opposed to the normal process of budgetary allocation, which would remain the purview of the OMB).  As part of this mission, the OFP would also establish regional and local branch offices to serve a similar purpose (monitoring of economic conditions, drafting of jobs projects, and the hiring of unemployed) as the regional and local branches of the Swedish Labor Market Board.

The “Fisc” would have three main functions: planning, finance, and budgeting. In the first place, the Fisc would draft plans for infrastructure development, public works, and job projects in order to develop a permanent “shelf” of projects that could productively employ varying levels of unemployed workers. In addition, the Fisc would also have a Research Division that would conduct investigations into the relative effectiveness of various fiscal stimulus options, develop new techniques and methods for targeting and directing funds, and any other research that might make the Fisc more efficient in its operations. Second, the Fisc would have an independent financial system, combining job insurance premiums with something akin to a financial transactions tax, the object being to build up a steady reserve of around $330 billion or 3% of GDP – something that could of itself have a sizable enough multiplier effect to halt and reverse all but the most severe of recessions.  Third, the Fisc would have joint budgetary authority over Federal “automatic stabilizers,” including Job Insurance, the Earned Income Tax Credit, Unemployment Insurance, Food Stamps, Medicaid, and aid to states.

At such a time as the appropriate Federal authority declared that the economy either was in or was in danger of falling into recession, the Fisc would draft an qualified “full employment budget,” (supplementing the regular Federal budget) boosting expenditures through its auto-stabilizer programs, and authorizing jobs projects to commence hiring. Similarly, when the economy was in full expansion, the Fed and Fisc could coordinate anti-“overheating” policy, whereby the Fisc could gradually build up reserves by increasing its insurance and tax rates (hopefully either preventing overheating or becoming ready for the future recession), and direct its planning divisions to draft sufficient plans to meet varying levels of recession.

The mission of the Fisc, in contrast to the divided mission of the Fed, would be singularly to ensure full employment, rising wages, and the broad distribution of purchasing power.

Question of Democracy:

However, the history of the Federal Reserve does raise a rather troubling caveat: how do we prevent a similar problem from emerging in the Fisc, whereby the institution becomes increasingly dominated by elites, whereby the sheer complexity of the tasks and knowledges of the institution prevents outsiders from engaging in meaningful oversight, or whereby the independent position of the institution severs the powers of government from true democratic accountability? Furthermore, how do we establish such an institution without violating the constitutional provisions that delegate the authority to spend and pass budgets to the Congress, and to the House especially?

  1. Public, Not Private – unlike the Federal Reserve, the Fisc would be a wholly public agency, answerable to the president (and thus, the president would be answerable for it). Hence, the Fisc’s decisions would be ultimately accountable to a national electorate that could choose to replace a contractionary stance with an expansionary stance or vice versa every four years. (Ultimately, this also suggests that the Fed will also need to be brought more within the immediate orbit of the Executive Branch, to ensure that fiscal and monetary policies follow the same track).
  2. Congressional Refusal – since the power to appropriate and pass budgets ultimately belongs to the Congress, the OFP’s “full employment” budgets would take the form of recommendations to Congress, similar to those of the commission that oversees the closing of military bases, and would be automatically enacted unless Congress were to pass a resolution rejecting the recommendation within a period of, say two weeks.
  3. Establish Oversight Capacity – similar to William Grieder’s call for the establishment of a Congressional Monetary Office to serve as Congress’ expert arm on montary policy (just as the Congressional Budget Office does on budget issues), the Congress should establish a Congressional Fiscal Office to give a “second opinion” to the OFP, and conduct oversight on the OFP’s recommendations and operations. Similarly, both the House and the Senate should establish powerful Committees on Fiscal Policy which the CFO would avdise, and who would conduct additional oversight on the Federal government, as well as serve as the primary committees for acceding to or rejecting the OFP’s stimulatory recommendations.

And there you have it, a Fisc that’s still responsive to the will of the people.

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