Saturday, 16 March 2013

The Tri-party Government Sector

Currently in the government sector, we have two entities mapped onto two policy ideas:

  • The central bank runs monetary policy
  • The government runs fiscal policy

The theology of modern economics is that fiscal policy is 'inert' and that the central bank is all powerful just by moving the overnight interest rate.

That has turned out to be nonsense and the powers that be are now desperately struggling to fit a working system into a model that is simply unfit for purpose.

One option that might just work is a tri-party structure along these sort of lines:

  • the central bank dealing with monetary policy. Exclusively targeted at maintaining an appropriate level of credit for investment while preventing ponzi schemes developing and asset bubbles. The governing board is a committee of parliament who make actually make the big decisions (based on advice from whatever 'experts' parliament chooses to consult). That deals with the current gaping democratic deficit at the central bank.
  • the Executive, what is normally called 'government'. Elected by the population to 'do something' (presumably different from the 'other lot'). They gets an account at the central bank and can borrow from the central bank at an interest rate the central bank decides. (Bear in mind the point above that the central bank is controlled by parliament). They are expected to maintain a balanced budget over their tenure and any loans are 'written off' when the electorate finally sacks them (ie there will be an automatic default built into the system which will limit the amount parliament will allow them to borrow). The Executive operation can then be managed more like a normal business/charitable entity which is in keeping with most people's experience - particularly the limited experience of politicians.
  • A new countercyclical fiscal authority reportable and governed by parliament that can borrow from the central bank at interest on an unlimited overdraft, but also which receives the central bank dividend (so the effective rate is zero). This authority funds the automatic stabilisers and any public facilities that are 'settled' (the NHS, public education, etc) and is tasked with maintaining full employment and price stability. It should probably do its taxing via a land tax and the sales tax. Making any spending the responsibility of the fiscal authority (and removing any spending) would require a 2/3rds vote in parliament.

By separating the cyclical components out and making that 'independent' rather than the central bank, you get the economy stabilised while at the same time allowing the Executive to pursue the plans it was elected to execute.

The fun starts of course when these three entities start pulling in different directions. But that's always the exciting bit when you're designing control structures.