Wanted: A Fourth Branch of Government

A work in progress.

Last revised 30 November 2013.  

The Case For Change

The single minded folks that pine for a Constitution that requires the Federal Government to balance its books -- at least every now and then -- do have a point. If they only knew how to make it.  Instead of coming to grips with the complicated calculation, that just might be adequate to consistently fund a complicated government, they plump for a simple balance to be struck each year.

Except of course for National Defense, broadly defined by Republicans.  And of course entitlements are entitlements, so Social Security and Medicare for the old, Medicaid and at least some food stamps for the poor and just a few other similar programs of lessor import (Earned Income Tax Credit, Supplemental Security Income, Farm Price Supports, college loans) can't be balanced on the back of largely Democratic constituencies.

Besides, how does a balanced budget amendment work when the Federal Reserve system is out there independently managing the money supply to simultaneously control inflation and foster job growth?  Of course we never have an occasion when the Fed is expanding credit while the Congress is contracting budgets or vice versa.  Or do we?   Do you recall the names Ronald Reagan and Paul Volcker? Nor are there battalions of lobbyists ceaselessly patrolling the halls of Congress and the by-ways of Executive agencies offering food, drink, erotic relaxation and helpful language to flesh out the next bill to become law at the expense of tax collections. Or are there?  No, a balanced budget is more a term of piety than an achievable goal, more a promise than a prospect.

The short hand phrase that policy wonks use for what we really need to do is: "coordinate monetary policy with fiscal policy."  The -- often unstated --  goal of that coordination is to keep American debt, public and private, as highly prized around the world, as it is today. Another goal is to ride herd on private capital markets so that, in the words of Volcker, "We take away the punch bowl just as the party is getting interesting."   He could have also said that "when the party is tanking, it is time to refill the bowl and mail more invitations."

Lets be specific.  We need to implement the hard half of Keynesian economics that we have never really tried. --  reducing debt when times are plush -- as well as its more popular half -- spending when times are poor.  Today we let the politicians of both parties spend their way to popularity on both occasions, and wonder why the national debt tends to ratchet up.

The other main block to coordinating monetary and fiscal party is that each is managed separately by arms of government that manage at separate speeds.  Let's say that President Clinton from her 2016 bully pulpit urges a modest slow down in the economy for the next two years.  All agree.  The Fed managers deliberate and agree on a series of steps to raise short term interest rates -- in secrecy of course as it would not do for speculators to be that privy to the future as envisioned by the Fed.

 Congress, now run by the Democrats under Harry Reid and Nancy Pelosi, puts together a budget that tries to be responsive to the President and to various party factions.  The process is noisy and in public.  Senate and House pass widely differing versions as Democrats are wont to do.  The joint reconciliation committee cuts so many deals that the original intent to tighten the budget is lost in a welter of amendments that increase spending.  Just as, Republicans say, the Democrats are wont to do, and as Republicans do also.

To her credit President Clinton vetoes the bill, but only gets a new one much later that is only marginally better which she grimly signs. The Fed attempts to compensate, but its tool kit is lacking policies that allow it to turn on a dime. The country, pulled this way and that, muddles through, saved yet again by the entrepreneurial spirit of its citizens, its command of immense natural resources, and the generally adroit and under appreciated coping skills of the Executive, which fly best under the radar, that is at the sub cabinet level.

To do better than that requires a level of fiscal management that goes way beyond merely balancing the federal budget for the sake of balance without regard for the needs of the country or the ability of the government to manage whatever level of debt the nation's wealth allows.

What is required definitely goes beyond the Federal Reserve system's charter to manage interests rates and the money supply in a way that keeps inflation in check while promoting job growth -- a logical contradiction.

What is required also needs to encompass the Fed's new responsibilities to identify and regulate financial and some other corporations deemed too big to fail.  It needs to manage the swings of the business cycle in a way that does not hamstring corporations from investing in new technology, goods and services whenever the mood strikes them, but is not as nearly accommodating to (supposedly) new forms of rent seeking via derivatives and such.

 What is further required is a regulatory regime organized to keep up with the financial system's talent for  inventing new obscure and opaque ways to manipulate paper so lucrative as to divert capital -- financial and intellectual -- from the real economy, and from inventing new ways to fall into the old trap of leverage which first sends the economy greedily soaring and then fearfully tanking. Leverage, we frequently learn anew, works both ways. A new form of leveraged derivative as an invention for the wealthy is not quite on a par with a new and improved model iPhone for the rest of us.  The latter merely deserves applause, while the former needs careful watching and the occasional stifling.

Finally, this new level of fiscal management needs to do things we haven't thought of yet in order to take charge of the framework within which governments and businesses alike can conduct their part of the economic affairs of the nation without inflating and bursting periodic bubbles..

Enter a fourth branch of federal government on an equal plane with the Legislative, Executive and Judicial.  Call it the Fiscal Branch.  Its first job will be to run the national economy at the macro level by establishing national tax and spending limits on a multi year basis (probably tied into the presidential inauguration cycle) that are constitutionally binding on on the Congress and the President.  Within those limits, the executive and legislative arms would function as usual.  Since this is a new federal only branch, no change need occur in the federal/state relationship as currently defined in the Constitution. 

Equally important, the Fiscal Branch would monitor and regulate the nations private financial institutions.  The Fiscal Branch would assume all the functions now performed by the Federal Reserve Board, plus those of the Comptroller of the Currency, The Securities and Exchange Commission, the Federal Deposit Insurance Corporation, and The Commodity Futures Trading Corporation.

Constitutional Language

All  responsibilities herein enumerated shall be vested in The Fiscal Branch of the federal government as necessary to independently direct the commanding heights of the national economy toward the goals of sustained and sustainable growth at full employment and of transparent conduct of financial transactions in public markets. 

A National Fiscal Chairman, nominated by the President and confirmed by the Senate, shall serve during good health and behavior unless removed by impeachment for high crimes and misdemeanors.  The Chairman shall at his sole discretion appoint and remove subordinate managers and other employees as needed to carry out these responsibilities.

The Fiscal Branch shall have the power to charge appropriately for its services and shall not be otherwise funded.

With the advice and consent of the Congress, the Fiscal Manager shall, upon nomination and confirmation, prepare and execute a plan for the permanent transfer to the Fiscal Department of the functions of the following federal agencies as presently constituted, and shall assume in a like manner the other enumerated functions:

1.  The Federal Reserve Board.

2.   The Comptroller of the Currency.

3.   The Securities and Exchange Commission.

4.  The Federal Deposit Insurance Corporation.

5.  The Commodities Futures Trading Corporation

6.  The National Programs of Home Loan Guarantees and Regulation.

The Fiscal Branch shall organize and conduct the transferred functions.   No other such functions shall be created by other than Constitutional amendment.

The Fiscal Branch shall publish a general revenue and spending plan binding upon the Executive and Legislative branches of the Federal Government. 

The plan shall commence upon the inauguration of the next elected President following ratification of this amendment and at the same time hereafter. The plan shall provide binding rates of deviance from tax and spending levels contained therein on an annual basis in keeping with the official fiscal year of the United States government as determined by statute.  Binding rates of deviance will not be effectively either zero  or infinite.

Upon a formal declaration of war or grave national emergency by the Legislative and Executive Branches acting in concert, the National Fiscal Chairman will suspend fiscal limits as necessary for the conduct of the war to its termination, and will reinstate them when at his sole discretion he determines the emergency is ended.

The Fiscal Branch shall publish such advisory goals and  plans as it deems necessary for the best conduct of the financial responsibilities of the United States.  

The Fiscal Branch shall  conduct and support a program of scientific studies in furtherance of its Constitutional responsibilities.

Frequently Asked Questions

What happens to the annual budget?

It is constrained by the general plan, which does not allocate funds to government agencies in the Executive Branch nor to the separate entitlement programs.  Instead it places boundaries around the overall revenues and expenditures within which the Congress and the President can tax and spend as they do today, preferably by formally devising and executing an annual budget. 

How much flexibility will the Congress have?

The same as today within the new limits established by the  Fiscal Branch.  The larger the gap between floor and ceiling in the revenue and spending limits the more flexibility.

What new responsibilities does the Congress have?

The Congress will need to keep track of  revenues and appropriations in order to be sure it does not fall below or exceed the legal limits of each.

The Congress and the President need to pass and sign into law a schedule for the receipt and implementation of each plan which provides for its implementation on a schedule that fits with the inauguration of a president.  Vice presidents who take charge due to the death or other incapacity of the president must comply with the current limits.

What about the President?

He remains the Chief Executive and Head of State.  He remains Commander-in-Chief.  Likewise the Congress remains as before.  Nearly all of the powers consolidated in the Fiscal branch are exercised, or could be exercised, by an agency set up to be independent of the Legislative and the Executive by current law.  This is especially true of the Federal Reserve System.

What's the point of it all? 

The Fiscal power is defined, consolidated and limited by Constitutional amendment to an equal footing with the three traditional branches of national government.  The Fiscal Branch sets broad limits but does not allocate revenues and expenditures.  It's purpose is to moderate the emotions of finance so that neither fear nor greed nor exuberance nor despair need plague the world's largest economy with recesions, depressions and panics. 

What about the public debt?  Do we ever pay it off?

We might, but why?  The instruments of our debt sold and traded publically are in demand around the world.  They are the collateral behind 30% of the world's debt.  What would replace it and at what cost?  Why are our treasury instruments so in demand?  Because we have never defaulted.  Because our debt in relation to our GNP is not excessive  when compared, for example, to Japan's debt to GNP ratio.   





 




   

 

     



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