Most revenue policies combine taxes and transfers. However, the effects of such fiscal policy are largely offset by changes in monetary policy, at least when the Fed is doing its job. Defenders of fiscal policy responded that changes in actual government spending could directly increase output even when there is a complete financial offset to the impact of the budget deficit on nominal spending. In reality, however, even this kind of “real” financial stimulus is unlikely to be effective in stabilizing the economy, since the decisions of Congress to spend money on new projects are driven by political factors, not the state of the economy. Here National Review:

As New Hampshire GOP Governor Chris Sununu observes, Congress has allocated $ 1.2 trillion for new infrastructure projects, but none of that has yet been spent, which means another inflationary pressure is mounting. What’s more, 50 states and countless localities are simultaneously trying to launch hundreds of large-scale infrastructure projects in times of fugitive inflation, chronic supply-chain problems, rising raw material prices, and construction-labor shortages. And an unprecedented increase in the price of diesel fuel. This is the worst possible time to try to start a huge number of construction projects from coast to coast.

Of course it is possible that these projects will be built during the next recession. But it is also possible that they will not roll out until the next recession is over. We just don’t know.

Intuitively, one can assume that a series of random fiscal shocks will not make business cycles more or less unstable. After all, random revenue stimulus can occur when economic output is above average while it is below average. In fact, macro models suggest that adding a random push to a volatile economy makes the business cycle worse than ever.

Covid’s revenue stimulus was mostly taxes and transfers, and so was the issue of financial offset. But even if you don’t believe the financial offset happened, the revenue stimulus seems to have been a mixed bag. The initial parts of the stimulus would have made the Kovid recession less severe otherwise, where the financial stimulus in 2021 would have contributed to the economic surge.

At the time, I argued that fiscal policy should focus on relief for the unemployed, not stimulus. Subsequent events have made me more confident in that view.

At the time, I argued that monetary policy should focus on getting NGDP back on track, but not on trends. Subsequent events have made me more confident in that view.

PS Commenter Cameron instructed me A graph The fiscal policy has been tightening over the last year. This is why many economists have underestimated the recent rise in inflation. If you (incorrectly) assume that fiscal policy determines overall demand, then you may have assumed that a tight budget deficit will relieve inflationary pressures. But it is the fiscal policy that drives the AD, not the revenue policy.

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