Governments the world over used to boast of their fiscal prudence, even though a five-year-old could have balanced the books during the credit boom. But any discipline flew out the window as soon as economic growth stalled (even earlier for some countries in Europe). And now that the US budget deficit is 10 per cent of gross domestic product, Ben Bernanke, chairman of the Federal Reserve, suggests that a fiscal rule might help.
Leave aside whether the head of a powerful institution that encouraged pre-crisis profligacy via overly loose monetary policy is in a good position to make suggestions about obedience. The Fed is right to worry about “failing to address our unsustainable fiscal situation”. In the short run, the uncertainty caused by high deficits hurts growth; further out, debt concerns push up longer-term interest rates. Still, there are many reasons to doubt that legislative rules would help.
The bond “vigilantes” who constantly monitor governments’ every move probably set a higher standard than any set of legislated rules. Politicians already have an electoral rule: financial disaster will make voters turf them from office. In any case, as Mr Bernanke acknowledges, imponderables (such as future economic growth) and structural problems (providing health care and retirement benefits to an ageing population) make hard and fast rules unrealistic.