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Fiscal dominance. To be honest, just two years ago I had no idea what those two words meant together. But working at Mercatus has a funny way of exposing you to the most crucial financial policy issues that almost no one is talking about. I first learned about fiscal dominance when I read a policy brief by Eric Leeper, who’s
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been writing about the topic for a long time. In it, Leeper says: “The introduction uses the term fiscal dominance as if its meaning is widely understood. It isn’t.” Given current fiscal conditions, it should be.


Fiscal dominance occurs when fiscal policy becomes the driving force behind inflation, and monetary policy is forced to passively stabilize debt. This can happen when government spending and tax policies push the central bank to react in ways it otherwise would not, compromising the central bank’s ability to pursue its mission.


Put another way: Imagine interest payments on our national debt forcing the Federal Reserve to cut interest rates, not to fulfill its mission of low inflation and maximum employment, but simply to make debt service more manageable. Ironically, that would likely lead to more inflation.


Veronique de Rugy, Jack Salmon, and David Beckworth have also been sounding the alarm on fiscal dominance for some time. Vero
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rightly pointed out the foolishness of subordinating the Federal Reserve to political concerns.

“While the Fed can temporally influence interest rates, especially in the short run, it cannot override long-term fears of inflation, economic sluggishness and political manipulation of monetary policy driven by unsustainable fiscal policy. That’s where confidence matters, and confidence is eroding.”
The Fed can’t cure the spending sickness we’ve caught over the past two decades. Fiscal dominance brings with it the risk of further inflation, potentially stagflation. Vero and Jack Salmon were publishing research on this topic as
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early as 2022 because they recognized the dangers.


David Beckworth
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echoes these concerns but gives us some hope that the bond markets may serve as a last line of defense for restoring fiscal sanity.


Why do I bring this up? Not simply to depress you, though the situation is alarming, but to highlight Mercatus scholars and economists who are able to see issues such as fiscal dominance coming. And now, media outlets and others are starting to pay attention. Reuters
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covered fiscal dominance this week, as have others. Let’s hope policymakers start paying attention too.

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Ben Brophy
Director of Marketing

Mercatus Center at George Mason University

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published his book on market solutions to environmental challenges. His toolkit offers economic solutions.


Jack Salmon
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continues to track the empirical data about public debt and economic growth. TL:DR, debt is generally bad for growth.


Vera Kozakar
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writes a love letter to capital markets and argues that we should do what we can to make those markets more accessible to businesses and prospective investors.









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