Fiscal Policy to the Rescue? Even When We're Not Trying

Sat, 22 Mar 2008 03:05:33 +0000

I suppose I'll have to let ideology slide for the sake of expediency. I will not stand in the way of Stan calling Steve Forbes a capitalist tool.

Picking up the more recent thread, we should keep in mind that fiscal policy is always being used for stimulus during an economic swoon. This is the notion of automatic stabilizers. When the economy falters, there is less activity to tax. Revenues fall. When the economy falters, there are more people claiming benefits from the social safety net, even with no changes in the rules. Expenditures rise. Both of them serve to widen the deficit. Collectively, we take a bit of a breather from paying for the government services that we consume. And that breather gives the economy a boost relative to what would happen if we insisted on paying for what we consumed period by period.

What's nice about automatic stabilizers is that they tend to get repaid as economic activity picks up--more activity to tax, fewer folks claiming benefits.

What's reprehensible about the current policy discussions of economic stimulus is the belief that tax cuts and spending increases done now for the sake of moving us from "somewhat negative" to "maybe positive" economic growth don't have to be paid back in the near term. I went on a couple of rants about this in January during Round 1 (here and here). Even the normal watchdogs for the federal budget gave them a pass.

I think of our current fiscal policy as akin to my going into my kid's room while he's sleeping and raiding his piggy bank because I'm having trouble scraping together enough change for another six-pack.

If I had any confidence that the federal government would balance the budget over a complete business cycle, I would be much more willing to support an active fiscal policy to counter the downturn.