Economists do not often preach about the virtue of self-doubt; least of all when they are Nobel Prize winners and Washington policymakers. This week, however, Robert Rubin (former US Treasury Secretary), Peter Orszag (former head of the Office of Management and Budget) and Joseph Stiglitz (the Nobel Prize-winning economist) have done precisely that.
They also urged policymakers to respond to this admission of uncertainty by overhauling their fiscal processes to embrace the idea of a “semi-autonomous discretionary fiscal architecture” based on “automatic stabilisers”.
This refers to the idea that some fiscal programmes should be automatically adjusted when conditions unexpectedly change — that is, when economists’ forecasts go wrong. This differs from the current Washington system where budgets are fixed each year, following those same projections and endless political haggling.
“If we can automatically gear the budget to what is actually happening in the economy [in real time] we may end up in a better place,” says Orszag. He points out that if automatic stabilisers were used for unemployment insurance, for example, support would be expanded or cut depending on tangible joblessness patterns rather than political bargains.
Might these proposals ever fly? Not soon. The Biden administration is currently embroiled in precisely the type of controversy that semi-autonomous fiscal discretion is supposed to address, namely whether its previously agreed package of unemployment benefits is too generous given the current rebound. And the White House is also so focused on pushing through Biden’s infrastructure package that there is scant capacity to start debating other ideas.
However, it would be a pity to ignore these proposals. It is rare for a centrist such as Rubin to team up with a progressive such as Stiglitz (as Orszag notes, these are the “polar extremes” of Democratic policymaking.)
And there are three reasons why it would pay to have more discussion of these ideas.
First, Stiglitz and his colleagues are quite right to call for more public honesty from policymakers about the limits of forecasting (never mind that self doubt was not something Rubin himself often displayed in office). In recent years some institutions, including the Bank of England, have tried to provide this by introducing fan charts to depict inflation projections.
But this is not universal. And, as the trio point out, there is one arena where more prevarication is particularly needed: interest rates. Today there is a widespread assumption that we live in a permanently low interest rate world. And while an FT poll this week showed that economists expect two Federal Reserve rate rises by the end of 2023, it is assumed that any tightening will be modest.
However, that idea needs to be hedged. As Rubin says, “there is deep uncertainty around interest rates”. Voters should be told.
Second, the group is also right to say that governments need to prepare for a world where their models go wrong. They suggest that the US Treasury should protect itself from the chance of sudden jumps in rates by selling government bonds with much longer maturities. That is sensible. They also argue that if policymakers had automatic stabilisers in some areas of fiscal policy, they would have more ability to craft discretionary policies in other areas to deal with shocks or long-term issues.
That is probably over-optimistic. But talking about uncertainties would crystallise a third point: the need to talk about the exploding levels of national debt, which has now topped 100 per cent of GDP.
This has received scant debate recently, since ultra-low rates have cut debt servicing costs. But if rates rise in the future, these costs will spiral and could spark a full-blown crisis. An unexploded bomb inside fiscal policy is hidden in plain sight.
There is no sign of crisis now; ten-year treasury yields are lower today than a few months ago. I suspect this will be maintained for some time. But as Rubin says: “In markets conditions can stay out of sync for a long time and then adjust very suddenly and savagely.”
This does not mean that the government needs to slash the debt by cutting spending (as some Republicans want). Nor does it rule out the idea of using automatic fiscal stabilisers in the future. But what is needed is a debate about proactive, long-term adjustments.
There are historical models for this. The 1983 Greenspan Commission created a plan to raise the age of social security benefits, incrementally over many years. It is currently taking effect without any political fights (or even much attention) because it is being slowly implemented in a pre-agreed fashion.
A tactic of “automaticity”, in other words, can sometimes work — when there is intelligent planning. The Biden team should take note; one of the most laudable things they could do today is bequeath certainty to their successors in some policy realms. Particularly in an uncertain world.
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