St. Louis Fed Chief Jim Bullard plans to release a paper this week that will prove what we’ve all been thinking: the government is incapable of leveraging fiscal policy to correct the business cycle.
From the St. Louis Fed’s press release:
Bullard concluded that “the turn toward fiscal approaches to stabilisation policy has run its course, and that the conventional wisdom that existed in the decades prior to 2007 is being re-established in the U.S.” Therefore, “stabilisation policy should be left to the monetary authority, which can operate effectively even at the zero lower bound,” Bullard said. And, fiscal authorities should set the tax and spending programs in a way that makes economic and political sense for the medium to longer term. In particular, “a stable tax code aligned with a stable plan of government spending would allow businesses and households to plan for the future in the most effective way,” Bullard noted.
Read more here: http://www.sacbee.com/2012/01/07/4170221/st-louis-feds-bullard-discusses.html#storylink=cpyIn a weekend presentation previewing the paper, Bullard said that after the Fed brought interests rates down to zero, many believed that the burden for short-term macroeconomic stabilisation had swung to fiscal policy. Once the zero lower bound for interest-rate targets was hit, it was thought, Fed policy became toothless.
Bullard counters that the Fed’s “unconventional” policy over the last three years — sustained zero interest rates and two rounds of quantitative easing — has staved an acute Europe-style crisis.
His three main points:
- “The political process is ill-suited to make the types of timely and subtle decisions that are called for based on the literature.”
- “Monetary policy has been quite effective, even while the policy rate has been at the zero lower bound.” So, “it is not necessary or desirable to turn to fiscal stabilisation policy.”
- “In the model, if monetary stabilisation policy is effective, then fiscal stabilisation policy has no effect except to increase debt levels.”