Proposal to Designate Real Dollars as Legal Tender and Its Fiscal Policy Implications

Price stability can matter. The United States has managed to avoid double-digit inflation since the Volker reforms of the 1980s. But the danger remains. Modigliani was right to worry. A law making real dollars legal tender might prompt better measurements of inflation. Many economists agree that our official ones overstate inflation by allowing two little for quality improvements. A Lexus or Tesla is nota Model A. That was the theme of the Boskin Commission report to President Clinton in 1995. The Boskin panel argued that quality-corrected inflation has run about 1.1% less than the numbers posted in the consumer price index (CPI). | think so too. But making real dollars legal tender, even by these imperfect measures, could still give more confidence in long-term commitments than the status quo. Speeding Up Fiscal Policy Designating real rather than nominal dollars as legal tender would amount to an unfamiliar and more direct form of monetary policy. Meanwhile devolution of banks into their separate deposit and lending functions, along with emergence of omnibus funds, need put no constraints on fiscal policy. Fiscal policy has prescribed tax cuts and government spending in slumps. It prescribes the opposite, at least in principle, in booms. A problem is that it has proved slow to implement. There is an “inside lag” while government diagnoses the problem and calls for a vote in the legislature. An “outside lag” follows until taxes come due and spending programs are put together and gradually put plant and people to work. The inside lag is unavoidable in a democracy unless the executive branch, or an independent agency like the Fed, is given standing limited authority to diagnose early signs of unemployment, and to address them with tax cuts or spending. And there must be enough outside lag to make sure that the medicine has good prospects in rate of return. Return comes first. Chapter 8 Banks, Money and Macroeconomics 2/8/16 18 HOUSE_OVERSIGHT_011107