The article discusses the ways in which the economy could be best stimulated in order to usher in a recovery from the economic crisis. The author discusses two competing approaches coming from two different theoretical perspectives. The first approach that is discussed is a demand oriented policy represented by a policy of increasing social security benefits in order to boost demand. The second one would be a supply-side view that argues for the lowering of taxes as a way of creating jobs.
By citing a research that compared the effects of tax cuts to the effects of increased social security, the author argues that the effects of fiscal policy cannot be analyzed in isolation from the decisions on the monetary side.
According to the article, the effects of an increase in social security are felt immediately in the rise of consumption, but the increase is also followed by the interest rates hike. In contrast, there is not such correlation when it comes to tax cuts. The author concludes, by citing expert opinions, that tax cuts do not cause monetary policymakers to tighten the monetary policy while the increase in social security does.
The insights of this article are very important in terms of gaining broader understanding of the power and potential effects of fiscal policy. Namely, if it is true that all effects of fiscal policy can be offset or virtually negated by a monetary policy that is aimed in the opposite direction, it follows that fiscal policy cannot even be discussed without reference to monetary policies. The effects of fiscal spending, tax cuts or tax increases cannot be discussed in isolation without analyzing accompanying monetary policies.
Mush of our political debate concerning fiscal issues revolves around tax increases and tax cuts but the effects of these policies cannot be predicted if we do not know the accompanying response of monetary policymakers. Taking into account the power of monetary policy to counter any change in fiscal policy is then the crucial political message of this article. Of course, the ramifications should be taken into account only if the argument that is provided is actually convincing.
This article expresses only one of many arguments pointing to the power of monetary policy in the modern economies. Essentially, it shows that fiscal policy is virtually powerless to affect the actual economy of the country if it is not supported by a complementary monetary agenda.
This argument is only one way of articulating the essential message coming from both left and right that the Federal Reserve is the most powerful institution and without it no economic agenda can get off the ground. This is a rather important conclusion and the merit of the argument has to be determined because the implications are rather important.
In a sense, the argument is rather simply and it relies mostly on factual observations. The policymakers in the Federal Reserve are able to change the interest rates and they obviously do so based on their political assessments. This means that the political choices and beliefs of the key figures in the Federal Reserve determine whether a certain fiscal policy of the government will be sabotaged by the monetary policy of the Fed.
Now, since the Fed is independent from the government and can make decisions without the approval of Congress or the President, it follows that much of the debate about fiscal policy that we have today in the United States is meaningless and there is very little that the public can achieve to influence the economy through the existing democratic system.
Works Cited
Economist. (2014). Central bankers, transfer haters. The Economist. Web.