Fiscal Policy is Not Economic Policy

One of the strange features of the period we are living in is that discussions of fiscal and monetary policy have pretty much preempted a more direct examination of structural problems in the American economy.  These topics have become our obsession, precluding direct debate about what sort of economy we want to be.

Perhaps because Americans are phobic about the idea of having a larger economic vision, we do not talk about how we would like the various parts of our economy to function together for our greatest well-being.  Instead, we talk about monetary policy (the Fed and the money supply) and fiscal policy (the role of government as a taxing and spending agent), as though getting these two parts of the equation right will, in themselves, produce a national economy that is prosperous and serves the various needs of the citizenry.

Perhaps it’s inevitable, because these are the two parts of our vast economic system over which officialdom can hope to exert control.  Almost occluded is the whole world of work—the whole world of enterprise—, the aggregate shape of which should always be our main point of reference.  Anti-statists though we are, we focus on government action more than on what American workers and companies are actually doing, or on the cultural and practical developments that could help them continue more happily, successfully, and harmoniously.

Instead, all roads lead back to the government, the federal government, which, as the economy has grown, so too has it, grown to be a huge economic agent, one so huge and complex that citizens can scarcely apprehend its many functions.  The government’s role as an employer—as a regulator—as a consumer—is massive.

Readers of this website have noted already that, while public discussion of government spending often focuses on social benefits distributed to the ill, the poor, and elderly, the government gives mightily to other economic actors, whether in the form of tax breaks, farm subsidies, employment, military spending, or other government contracts, forming a great gift-cycle that is myriad and so circular!  Because, of course, we pay our part for all of these things.  It’s all so different from the days, long long ago, when there were no income taxes, and the government’s main functions were running the P.O. and sending farmers experimental seeds!

Notwithstanding the benefits that might follow from keeping our sights trained on creating opportunities for American labor and improving the character of our own economic activities, we are entering a period when fiscal policy will remain at the center of public consciousness, where more and more attention will be trained on issues of taxation, and on tax reform itself, of all things.

Federal Revenues & Expenses as a Percent of GDP, 1981-2012

Image: from this source

The Map of Federal Benefits
Help Understanding the Federal Budget
Eduardo Porter, “A Nation With Too Many Tax Breaks,” New York Times, 14 March 2012.
GRAPHIC: “Who Gets the Breaks and Benefits,” New York Times, 14 March 2012.
Tracy Gordon, “What States Can, And Can’t, Teach the Federal Government About Budgets,” Brookings, March 2012.
GRAPHIC: “Government Spending by Level, as a Percentage of GDP,” Brookings.

5 responses

  1. Susan, yes it would be nice if we could focus the debate on these bigger-picture questions, but given how badly the federal government does with fiscal policy it seems like a bit much to ask. Nor is it is a good idea to distract the Congress and the Executive branches from this essential function until it improves its performance in this area.

    Two other culprits are economists and the press. The performance of my profession in this crisis has been embarrassing. It should be apparent to all that macro-economists lack basic understanding of key behavioral parameters–such as how tax cuts or public works affect consumption. Actually, there is evidence out there that has been ignored by many economists.

    If American economists have performed badly, their European counterparts and the policymakers whom they advise have been worse, almost to the point of being criminally negligent. The European Central Bank, in its push for fiscal austerity, has done enormous damage to the European and world economies. The idea that inflicting this kind of hardship on Spain and Ireland–two countries with excellent fiscal records before the crisis–is inexplicable to me. Let’s call it blood-letting economics!

    China and the US central bank have been the two lone key players that have performed reasonably well in all of this. In case of the Fed, it has had to make up and compensate for the miserable performance of its fiscal counterparts. I would say that, despite being asleep at the wheel before the crisis hit in March 2008 with the Bear-Stearns bailout, it has basically almost single-handedly–with some help from China’s pro-growth fiscal policy–saved the world economy. The discussion and debate in the US have gotten so bad that one party talks about abolishing the Fed or diminishing its independence. (Disclosure: I am a consultant for the Fed.)

    Here are my last two remarks about the absurdity of current US fiscal policy: (1) At a time of incredibly low ten-year rates, high construction unemployment, and low capacity utilization rates, isn’t this the perfect time to embark on public-works investments? It is not as if there is nothing to repair or build. (I agree that high-speed rail is not an efficient use of money, but neither are destroyers and aircraft carriers!) and (2) When the federal government can borrow at such low rates, why are states and local governments laying off teachers and police officers?

    As for the press: The CBO graph showing average taxes under Obama being the lowest in 30 years (actually it is more than 50 years, extending back to the 1950s) says it all!

    • Bob–Thank you for this detailed reaction. I agree that it would be unwise to look to Congress for more in the way of leadership at this point; still, I think it’s odd that, politically, we try to attain certain broad economic “goods” or goals primarily through the use of fiscal or monetary policy. In the provisions of our tax code, for instance, we can identify certain things that we deem to be socially important, whether it’s home owning or charitable giving or making our homes more energy-efficient. Still, we are averse to articulating or affirming these economic goods as goals in any direct way. Not everything can be engineered through a tax break–or an interest rate–, and our failure to build cultural consensus around such topics is proving a great handicap nationally. Reluctance to articulate what we are aiming for impedes the resolution of many contemporary issues, whether it’s what kind of education we should be providing our kids, or what kind of natural environment we want to see.

      By the way, I am an absolute believer in high-speed rail. While we’re at it, maybe we should rethink our aviation system too.

  2. Congress certainly blurred the two policies with the “Federal Reserve Act,” directing the Fed to target stable prices and full employment–the dual mandate. Some insist that the Fed has no business fiddling with the latter. The ever lucid Charlie Evans, president of the Chicago Fed, demurs (,
    as summarized neatly in this article from the Economist
    and clarifies the role of the Fed.

    • Uji–Thanks for sending along the links to these articles. Little did you know that I had planned to write a companion piece, “Monetary Policy is Not Economic Policy.”

      I hasten to say that I am not an enemy of the Fed. I think the Fed is essential. It’s a great institution. It’s improved our national life. I agree with Robert LaLonde that it kept our financial system from collapsing. But I think it’s very odd that we are relying solely on THE MONEY SUPPLY to achieve goals like preserving job skills or achieving full employment. I mean, who else in our country is striving to do these things? (No wonder Ben’s hair turned white overnight.) Yet, do you think economic actors can all be moved in the right direction just by changing lending rates and the amount of money in circulation? I (non-technocrat and non-economist that I am) am skeptical that this is the only (or even the most likely way) to achieve these aims.

      We as a people expect miracles to result from monetary policy; that’s why everyone is so pissed with Ben Bernanke these days. Yet why aren’t they upset with other governmental agents–the Secretaries of Labor or Commerce, for instance–who might, on the face of it, be construed as bearing some responsibility for these important aspects of economic activity? 99 out of 100 Americans cannot even name these individuals, but we all know who Bernanke and Geithner are.

      Thanks to all you brainiacs for tuning in.

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