IEA: The Monetary and Fiscal Policy Sunshine Act

The Monetary and Fiscal Policy Sunshine Act
Summary and Explanation

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Contents

Purposes
Main Provisions
Why This Bill Is Important

I. Purposes

To facilitate and encourage more systematic coordination of all aspects of our national economic policy, especially monetary and fiscal policy, in accordance with the Humphrey/ Hawkins (H/H) "Full Employment and Balanced Growth Act of 1978" (FEBGA).
To facilitate the achievement of stable full-employment economic growth, with low inflation and stable low real interest rates.
To facilitate reduction of government budget deficits (federal, state and local) -- and thus facilitate lower tax rates -- by preventing recessions, high unemployment and high real interest rates.
To facilitate congressional and public understanding of monetary policy and its effect on the economy.
To facilitate congressional and public understanding of the relationship between high unemployment and government deficits.
To facilitate longer-range planning by business firms, labor unions, consumers, and all levels of government.
To facilitate and encourage national saving and investment by preventing recessions and reducing unemployment.
To help reduce inequalities in the distribution of income and wealth caused by recessions and high unemployment.
To minimize speculative short-run activity in stock, bond, commodity and currency markets by achieving more stable economic growth and financial balance.
To minimize stock and bond market fluctuations caused by speculation regarding future Federal Reserve policy decisions.

II. Main Provisions

Monetary Policy. The Federal Reserve ("Fed") is required to:
1. Include in its semi-annual reports to Congress under the (FEBGA):
  1. Economic growth recommendation -- for the most economically appropriate, stable, structurally-balanced, non-inflationary, "soft-landing" real-GDP growth track towards the 4% unemployment policy target mandated by the FEBGA -- for the full 5-year period of federal budget projections.
  2. Projections (forecasts) for the corresponding values of other key economic data, particularly:
    - a 4% unemployment version of the long-run trend of Potential GDP,
    - key factors in the economy's overall financial balance -- the overall supply and demand for credit, including the federal deficit or surplus.
  3. Key assumptions on which these projections and recommendations are based.
  4. Evaluation of the degree to which these projections and recommendations seem compatible with the structural-balance relationships needed for stable long-run economic growth.
    Whenever its projections (1b) appear to be incompatible with its growth recommendations (1a) and structural balance relationships (1d), the Fed should also include:
  5. Recommendations for other government economic policies which it believes would contribute to more systematic coordination of all government policies to achieve the recommended recovery growth track. These recommendations should address particularly:
    1. the size of the structural ("stabilized employment") federal operating deficit (in relation to the total supply of financial saving and the borrowing by other sectors, and
    2. the most appropriate package of anti-inflation tools (other than increasing unemployment).
    (As a matter of courtesy, and to facilitate optimal on-going coordination, these recommendations should of course be made, to the extent possible, after adequate non-public consultation with the relevant agencies.)
2. Publish a monthly Economic Report on progress towards achieving the recommended recovery growth track, including charts of
  1. seasonally-adjusted nominal and inflation-adjusted data for the M1 money stock,
  2. the money demand ratio (M1/GDP),
  3. the GDP "operating rate" (actual as % of potential), and
  4. other key data which can facilitate public understanding of current economic developments and how government policies are being mobilized and coordinated to achieve that goal.
Congress and the President are required to:
1. Use this budget and deficit as the basis for media presentations.
2. Also use this budget as the primary basis for intra-government budget-balancing discussions and negotiations, and for coordination with Fed monetary policy.
Note: In respect for the Fed's traditional institutional independence, this bill does not mandate any particular fed policy targets; it merely requires the fed to explicitly accept its key joint responsibility (with other government agencies) for achieving and maintaining the FEBGA policy objectives, with special emphasis on the goal of reducing the high unemployment which is so pervasively destructive of other economic and social values.

III. Why This Bill is Important

It is well understood today that the Federal Reserve can't directly control the growth rate of the economy's long-term "potential" output, but that it does largely control the current growth rate, unemployment rate and rate of recovery towards real full employment.
Congress is now required to "project" the federal budget for five years ahead on the basis of unreliable and ever-changing economic forecasts, but the Fed, which so greatly affects the economy's actual tax receipts and "safety net" costs, is required only to "forecast" the economy for one year ahead -- an absurd lack of financial coordination which no successful private business would tolerate.
Until recently, it had been Fed policy ever since the 1973 OPEC-induced inflation to keep unemployment well above the 4% pre-1973 prosperity level -- which is also the policy target legally mandated by the FEBGA. This policy was primarily responsible for well over half of the total increase in federal debt (and deficits and interest cost) from 1973 to '93, and thus also largely responsible for the false assumption that we "couldn't afford" vital public investments and services.
Since 1993, the budget-balancing policy of the Clinton Administration, and the many technological and competitive factors tending to reduce business costs have helped to reduce the trend rate of inflation. This has apparently persuaded Fed Chairman Alan Greenspan to risk allowing the unemployment rate to gradually fall well below the former inappropriate 6% NAIRU ("Non-Accelerating-Inflation Rate of Unemployment) policy target -- rather than always trying to "preempt" any even potential inflationary tendency. He has indeed done a remarkable job of managing this experiment.
However, Fed monetary policy is still managed on a largely judgmental, ad-hoc and secretive basis, and Greenspan's successor may not be so astute. This is simply not a safe or sound long-run basis for monetary policy-- especially in a democratic society.
The recovery process must not stop at 41/2% or 5% unemployment. High unemployment has been, and continues to be, responsible for many of our worst economic and social problems and hinders their solution.
Fortunately, the FEBGA's 4% unemployment policy target is not impractical; it is based on our own historical experience. During the first 28 years after World War II, U.S. unemployment was below 4% in ten years -- and even close to 3% in four. It was above 6 % only twice, and inflation was mostly below 2%. Moreover, for 14 straight years before the huge 1973 OPEC "oil tax" upset the world economy most leading industrial countries kept their unemployment below 2%. Clearly, serious recessions and high unemployment are not necessary or "natural," even in a "free market" economy; they are man-made, caused primarily by policy mismanagement.
Some factors now reducing inflation may indeed be temporary. But inflation can be controlled much more effectively, and, from a national perspective less expensively, by policy tools other than Fed-induced high unemployment -- such as:
1. a special mandatory COLA price index which excludes the effect of tax increases (such as energy, tobacco and other sales taxes) which are included in prices (to avoid their inherent spiral effect.
2. effective enforcement of anti-monopoly legislation,
3. a comprehensive national health service (to reduce the costs of health care and business "benefit package").
4. more efficient national employment services, and better education, training, and other means of adequately preparing high-school students, adult workers and present welfare recipients for the job opportunities actually opening up -- to increase the effective supply of labor without less resort to competitive wage incentives.
5. a tax on huge amount of competitive brand-name established-product advertising which contributes little to reliable consumer information -- with the proceeds used to finance much better consumer education in schools and on TV.
6. an undistributed profits tax to reduce the stock market booms which fuel consumption of high-price luxury goods.
7. facilitation of labor union organization combined with an economic "social compact" which makes labor an equal partner both in corporate productivity planning and national policy,

In sum,

to achieve the FEBGA goal of stable full employment with low inflation and stable low real interest rates there must be much more systematic coordination of our monetary, fiscal and other macro-economic policy tools, and the public and Congress need a much better understanding of how this works.

With the present declining trend of unemployment and inflation rates there is now a unique political window of opportunity to put the FEBGA goals back at the top of the national agenda by passing the Monetary and Fiscal Policy Sunshine Act.

Written: October, 1996
Last revised: May 13, 1998

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