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Just a random thought on macroeconomic policy. Macroeconomic policy can be roughly divided into fiscal and monetary policy. Since last century, independent central banks guiding the bulk of monetary policy have become widespread, practiced by all post-industrial countries (well, for now – Ron Paul’s push to audit of the Fed may change that).

The logic is simple. Especially when guided by a clear, measurable mandate, independent central banks produce better monetary governance than with politicians in charge. Politicians, including elected ones, tend to manipulate monetary policy for short-term goals. Take Deutsche Bundesbank for example – with a clear mandate, strong independence, it transformed the hyperinflationary mark into a hard currency.

So why do we trust politicians, especially elected ones, with fiscal policy – especially taxation? Take taxation structure in most post-industrial, developed countries – they tend to be extremely complex, riddled with special interest taxes and shelters. Furthermore, the tendency to leverage and deficit spending is high in most countries – fiscally-prudent democracies are rare and in between.

For the latter, the only policy being used to control politicians is the balanced budgets requirements – which can be quite daft. There is no incentive towards maintaining a reserve (saving for a rainy day), require governments cut spending and raise taxes during recessions, and prevent/discourage leverage where it make sense (like long-term infrastructure projects).

What if, instead, independent bodies sets taxation policy, with specific mandate directives. Elected politicians cannot pull countries like Greece into a fiscal nightmare. Also, because increase in government entitlements will show up in tax increases, politicians will be more prudent in laying them out – and also more incentivised to scale them back. Think America’s impending Social Security crisis – if payroll taxes rose in tandem with expenditure, the political will to reform Social Security would be much higher.


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