Jesse Harwitz recently asked me if it would have a better distributional effect if used as a stabilization tool instead of monetary policy. The insight is that monetary policy involves the purchase of financial assets where fiscal policy can provide money directly to the people.
I don’t see any significant distributional differences, and I believe my perspective is broad among economists. But I’ve noticed that a lot of non-economists look at things differently and why it’s worth asking.
The first thing that can be noticed about revenue policy is that it does not involve making new money, but it takes the existing money and turns it around. When the government sends you a check, the money comes from taxes or loans. The public as a whole does not have much money, but money has been transferred from Peter to Paul.
Revenue policy can be further justified by the realization that revenue expenditure can redistribute money from the rich half of society to the poorer half of society. But such redistribution is largely unrelated to the use of revenue policy Stabilization tool. Even governments that do not use monetary policy as a tool for stability often have a welfare state – but they do not vary in the size of the welfare state as a tool to reduce the business cycle. Instead, they often rely on monetary policy.
I suspect that some people mistakenly see fiscal policy as justified because they combine the existence of a fiscal stability regime. Extensive Revenue policy. But the stabilization policy necessarily uses both expansionary and contraction policies. An expansionary policy occurs when the policy is more expansive than average and a contractionary policy occurs when the policy is less expansive than average.
It is true that over time the national debt trend tends to rise, leading to the notion that expansion policy is more general than contraction policy. But over time, national debt will continue to rise, regardless of whether fiscal policy is being actively used to stabilize the economy. In the late 2010s, the federal government expanded the national debt to take advantage of the trend towards lower interest rates, not because we were in recession. If the average (cyclically adjusted) budget deficit is $ X, then an active revenue stabilization policy stimulus extends the deficit above $ X if needed and runs a deficit below $ X when the stabilization policy calls for spending cuts. In this framework, there is no such thing as a permanently expanding stabilization policy.
Economists think about issues of fairness in terms of long-term distribution of income. It is not clear why the fiscal or financial stability policy will have a long-term impact on income distribution. Even if the government does not use revenue or monetary policy to stabilize the economy, there will be a government budget and a money supply. In most cases, both will go up over time. It is possible, of course, that the mere existence of the government budget has a distributive effect, and perhaps the existence of the money supply also has a distributive effect. But it is not clear (at least to me) how much government funding will change in a money-laundering or counter-cyclical manner will have any significant distributional effect.
The Fed’s balance sheet has expanded dramatically in recent decades, even as part of GDP. (I hope we lived with a much smaller balance sheet before 2008.) But this balance sheet is not due to expansionary monetary policy, but rather reflects the Fed’s shift to a floor system with interest payments on bank reserves, as well as a declining trend in NGDP growth. Which lowers interest rates and increases the demand for base money.) Prior to 2008, the Fed pursued a very proactive stabilization policy without buying large amounts of financial resources. The two issues are basically unrelated.
PS I am not arguing against the so-called “automatic stabilizer”, which causes the budget deficit to go somewhat counter-cyclical, even without an active revenue stabilization policy. But the policy of active stabilization is best done by the financial authorities.