The Menace of Fiscal QE by George Selgin

Author:George Selgin [Selgin, George]
Language: eng
Format: epub
Publisher: Cato Institute
Published: 2020-02-10T23:00:00+00:00

QE and Backdoor Spending

The other reason for fiscal QE’s political appeal is its ability to support “backdoor spending,” meaning federal agency spending that bypasses the annual congressional appropriations process.4 Even before the Fed acquired its present quantitative easing powers, it was understood to be capable of facilitating backdoor spending. J. Alfred Broaddus, Jr., and Marvin Goodfriend (2001, 13) write:

A healthy democracy requires full public disclosure and discussion of the expenditure of public funds. The congressional appropriations process enables Congress to evaluate competing budgetary programs and to establish priorities for the allocation of public resources. Hence the Fed—precisely because it is exempted from the appropriations process—should avoid, to the fullest extent possible, taking actions that can properly be regarded as within the province of fiscal policy and the fiscal authorities.

Thanks to its post-2008 QE powers, the Fed’s ability to encroach upon “the province of fiscal policy,” and thereby fund government undertakings independently of the congressional appropriations process, is now far greater than it was when Broaddus and Goodfriend wrote.

Substantive legislation might, for example, create a new program to be carried out by either an existing or a new agency, while also granting that agency “borrowing authority” for the purpose of funding the program. Borrowing authority normally allows agencies to sell securities either to the Treasury or directly to the public. But if granted in conjunction with a fiscal QE plan, it could instead mean having agencies sell securities to the Fed.5 As Modern Monetary Theorists Scott Fullwiler and Randall Wray (2010, 20) explain, when agencies borrow from the Fed rather than the Treasury, the appropriations process is all the more thoroughly bypassed: whereas Treasury lending must itself be approved by Congress, “the Fed does not face such a budgetary constraint—it can commit Uncle Sam to trillions of dollars of commitments without going to Congress.” Furthermore, agency borrowing isn’t itself subject to statutory debt limits.6

Backdoor spending appeals to advocates of large-scale, ongoing spending programs that would otherwise be difficult to fund initially and more vulnerable to future funding interruptions. In a compelling critique of backdoor spending from a constitutional perspective, Kate Stith (1988, 1381) explains that fiscal illusion comes into play here as well:

Of course, the true (“opportunity”) cost of any permanent, indefinite, or backdoor spending authority is no different from the cost of an annual appropriation. But . . . Congress may operate (as a matter of policy or of psychology) under the illusion that funding for the activity does not affect other budgetary decisions, and that the present Congress is neither responsible nor accountable for the program.

What backdoor spending certainly does is make it less likely that Congress will effectively control government spending. To the extent that the executive branch can bypass the appropriations process, Stith observes, it alone

defines the scope and character of the public sphere, especially in areas that inherently require significant executive discretion. Congress abdicates, rather than exercises, its power of the purse if it creates permanent or other open-ended spending authority that effectively escapes periodic legislative review and limitation.

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