Question

The United States has a system in which Fiscal and Monetary policy are independent. Do you prefer this approach to Macroeconomic Policy or would you prefer one group of people controlling both Fiscal and Monetary policy? Justify your answer.

Answer 1

Independent governance is vastly better, because what travels under the two generalized labels are independent - different objectives, means, and metrics. Fiscal “policy” is not a policy, but a paste-on generalization about government income and expenditure and its year to year growth and change in net (deficit or surplus). The decisions concerning Federal (and, not to be forgotten, state and local income government, which constitute 10% of GDP versus Federal government’s 6%) touch on a huge range of topics, almost none of which are about banking. In contrast, the Federal Reserve deals almost exclusively with banking and private credit; it is a specialist role for a specialist segment of our economic infrastructure. The major intersection of the two is the “full employment” imperative (originating in the“Employment Act of 1946”) in which Congress stopped creating a “Full Employment Budget,” but left the full employment objective to the Federal Reserve, even though the banking system can “accommodate” economic acceleration but cannot get people and entities to save less and spend more. The major problem for all concerned is not “independence” or “dependence,” but that we live in an age of “precision” but the Federal Reserve’s capabilities are highly imprecise (everybody gets higher or lower interest rates, need them or not), while Congress can and does target spending and taxes, but not in an agile, effects-focused way - durable goods sales have been high, services low, but every employee and employer got the same tax decrease or increase.

The constitution stipulates that the legislative branch has the exclusive responsibility to spend the taxpayers money, and the treasury department, under the executive branch has the exclusive power to print money. Therefore, fiscal policy is a joint venture between Congress and the President. Between them , they can constitutionally spend an unlimited amount of money, issue an unlimited amount of debt and print an unlimited amount of currency.

The United States didn’t have a central bank that could influence monetary policy until the Federal Reserve Act of 1913 was passed. And even today has only limited control over monetary policy. The banking industry, through the Federal Reserve has become a willing accomplice to the federal government’s insatiable appetite for spending ($21 trillion public debt and a 2019 projected budget deficit of over $1 trillion). They are able to accomplish this by being able to create their own currency (Federal Reserve Notes) and by requiring all federal and state chartered banks to maintain reserve requirements with the Fed. This reserve requirement is met by purchasing U.S. Treasury Bonds. Therefore all of the federal debt that isn’t purchased by domestic and international investors is sopped up by the banking industry.

The Federal Reserve is able to influence the amount of money in circulation primarily by using one of two methods. The first is by being able to control the interest rates in which its member banks borrow money from the Fed. And second, by managing the volume of bank reserves in the system, which Paul Volcker did in the late 1970’s.

Sorry for the long winded explanation. To answer your question: I believe that there are certainly problems with the current Federal Reserve System, however, we should be thankful that it is not a department under the executive branch. The independence of the Federal Reserve has acted as a check on the use of unbridled inflation.