“The Fed” now has two meanings

In a comment someone really, really smart (and handsome) said:

Believers in fiscal policy should be thinking of ways to fix the administration of it. Maybe an independent fiscal authority with a precisely defined policy instrument (e.g. stimulus checks and a consumption tax) and mandate (e.g. keep consumptions spending smooth)?

Eric Leeper has a new paper (pdf):

In this lecture, I argue that there are remarkable parallels between how monetary and fiscal policies operate on the macro economy and that these parallels are sufficient to lead us to think about transforming fiscal policy and fiscal institutions as many countries have transformed monetary policy and monetary institutions. Making fiscal transparency comparable to monetary transparency requires fiscal authorities to discuss future possible fiscal policies explicitly. Enhanced fiscal transparency can help anchor expectations of fiscal policy and make fiscal actions more predictable and effective. As advanced economies move into a prolonged period of heightened fiscal activity, anchoring fiscal expectations will become an increasingly important aspect of macroeconomic policy.

The paper is human friendly and is best read as a history of monetary economic thought. Leeper underscores that expectations are key to the success of fiscal policy (like they are to monetary policy). For example, if the public expects deficit spending to be followed by increased taxes in the future, GDP can contract today (i.e. negative multipliers). He suggests that, like in monetary policy, transparency and commitment would make for better fiscal policy, but he points out:

For many reasons it is not an easy task to enhance fiscal transparency by providing information that helps to anchor expectations of future fiscal choices. The two most prominent reasons offered for the difficulties are:
(1) Fiscal policy is complex;
(2) Current governments cannot commit future governments.
These reasons are true. But they also underscore why enhanced fiscal transparency is potentially so valuable.

The best line in the paper:

Further complicating the fiscal decision process is a stunning fact: a clearly defined and attainable set of objectives for fiscal policy is rarely specified. Many fiscal authorities lay out their objectives on their web pages. Sustainable fiscal policy is the most common goal. But achieving sustainable policy is equivalent to aiming to avoid government insolvency. If a company’s CEO were to announce to shareholders that the company’s overarching goal is to avoid bankruptcy, the CEO would soon be replaced. Surely people can ask for more than minimal competence from their public officials.

He has a few suggestions for increasing transparency. First, have better projections of fiscal policy and its impact. “Fiscal authorities could produce more sophisticated projections, grounded in economic
reasoning, that characterize outcomes that, as a matter of economic logic, could occur.” Second, there could be a fiscal Fed that sets deficits. Third, agree on some basic fiscal policy objectives that can be easily measured. Fourth, define some fiscal policy rules that meet those objectives. Lastly, establish credibility.

And my vote for the understatement of the year: “But fiscal decisions are only a small subset of the votes that legislators place, so fiscal votes can easily get lost in the morass of electoral politics.” I wonder, though, if it was ever thought that monetary authorities would have as much credibility, transparency and independence as they do today.

He ends on the ARRA, “I shall end with an egregious example of non-transparent fiscal policy: the recent $787 billion American fiscal stimulus plan.”