Economist Kenneth Rogoff notes that the last decade has seen a resurgence of interest in using fiscal policy to stabilize the business cycle as faith in the power of monetary policy has declined. He doesn’t think this shift represents intellectual progress.
Touring the economic journals and major meetings of academic economists, one sees model after model of West Wing fiscal policy — thoughtful, reliable, and credible — that seems to buttress such arguments. But the recent literature and debate almost completely ignores political-economy issues that were studied intensively in the 1980s and 1990s. The lessons learned then are now largely forgotten.
This shift in thinking has happened even as casual empiricism has been increasingly pushing the other way. Monetary policy during the last decade has certainly been open to criticism. But fiscal policy has been wholly perverse from a macroeconomic standpoint.
If you want to use the federal budget anti-cyclically, you’d want deficits to rise when the economy is weak and fall when it is strong. But deficits as a share of GDP fell from 2009 to 2015, when the economy was in recession and then recovering, and have been rising from 2015 through today, when the economy has been expanding. There’s nothing in this record that should instill confidence in the ability of Congress and the president to play a stabilizing role.