Fiscalism

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Fiscalism is a term sometimes used to refer the economic theory that the government should rely on fiscal policy as the main instrument of macroeconomic policy. Fiscalism in this sense is contrasted with monetarism, [1] which is associated with reliance on monetary policy. Fiscalists reject monetarism in a non-convertible floating rate system as inefficient if not also ineffective [2]

Contents

There are two types of fiscalism: [3]

Roots

Fiscalism relies heavily on Keynesian theories which states that an active government intervention is necessary to ensure economic growth and stability. [4]

For fiscalists, employment is of primary concern. Y (income) is the independent variable in PY = MV (where P = price level, M = amount of money, V = velocity/turnover of money), changes in which affect effective demand. So fiscalists hold that Y needs to be controlled through fiscal policy, which affects effective demand. Effective demand draws forth investment to meet profit opportunity, and effective demand is income-dependent, since consumption cannot be funded by drawing down savings, selling assets, or financed by borrowing sustainably. If supply and demand are stabilized at optimal resource use, then unemployment is reduced. [5]

Fiscalism and Modern Monetary Theory

The holy grail of macroeconomics is full employment along with price stability, which implies highly efficient use of resources while controlling price level.

In the first place, Modern Monetary Theory (MMT) rejects the monetarist explanation virtually in toto, claiming that it is based on an incorrect view of actual operations of the Treasury, central bank, and commercial banking, and how they interact. Secondly, MMT explains how to succeed in the quest for the holy grail through employment of the sectoral balance approach developed by Wynne Godley and functional finance developed by Abba Lerner. The thrust of this approach is to maintain effective demand sufficient for purchase of production (supply) at full employment by offsetting non-government saving desire with the currency issuer's fiscal balance. This stabilizes aggregate demand and aggregate supply at full employment (adjusting aggregate demand wrt changes in population and productivity) without risking inflation arising owing to excessive demand.

Note that this does not apply to price level rising due to supply shock, such as an oil crisis provoked by a cartel exerting a monopoly, or shortage of real resources., e.g. due to natural disaster, war, or climate. This is a separate issue and must be addressed differently according to MMT.

In a non-convertible floating rate monetary system, the currency issuer is not constrained operationally. The only constraint is real resources. If effective demand outruns the capacity of the economy to expand to meet it, then inflation will result. If effective demand falls short of the capacity of the economy to produce at full employment, then the economy will contract, an output gap open, and unemployment will rise.

This view is based on a Treasury-based monetary regime, in which money is created through currency issuance mediated by government fiscal expenditure. Issuance of Treasury securities to offset deficits functions as a reserve drain, which functions as a monetary operation that enables the central bank to hit its target rate rather than being a fiscal operation involving financing. Similarly, taxes are seen not as a funding operation for government expenditure, but as a means to withdraw non-government net financial assets created government expenditure, in order to control effective demand and thereby reduce inflationary pressure as needed iaw[ check spelling ] the sectoral balance approach and functional finance.

This view is quite the opposite of the credit-based monetary presumptions of monetarists, which MMT regards as appropriate to a convertible fixed rate regime like the gold standard but not to the current non-convertible floating rate system that began when President Nixon shut the gold window on August 15, 1971, and was later adopted by most nations, excepting those that pegged their currencies, ran currency boards, or gave up currency sovereignty as did members of the European Monetary Union in adopting the euro as a common currency.

It is important to note that MMT economists do not recommend the adoption of a Treasury-based monetary system. Rather, they are asserting that the present monetary system is already Treasury-based operationally, even when governments choose to impose political restraints that mimic obsolete practices and create the impression that these are operationally necessary.

MMT also recommends an employer assurance program (ELR, JG)[ clarification needed ] to create a buffer stock of employed that the private sector can draw on as needed. This reduces idle resources and presents the possibility of achieving actual full employment (allowing 2% for transitional) along with price stability, which monetarism presumes inflationary. The ELR program also establishes a wage floor as price anchor for price stability. [6] [ self-published source? ]

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<span class="mw-page-title-main">Keynesian economics</span> Group of macroeconomic theories

Keynesian economics are the various macroeconomic theories and models of how aggregate demand strongly influences economic output and inflation. In the Keynesian view, aggregate demand does not necessarily equal the productive capacity of the economy. Instead, it is influenced by a host of factors – sometimes behaving erratically – affecting production, employment, and inflation.

<span class="mw-page-title-main">Macroeconomics</span> Study of an economy as a whole

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<span class="mw-page-title-main">Stagflation</span> High inflation, low economic growth, and high unemployment

In economics, stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actions intended to lower inflation may exacerbate unemployment.

<span class="mw-page-title-main">Inflation</span> Devaluation of currency over a period of time.

In economics, inflation is an increase in the money supply, causing the consumer price index (CPI) to increase. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money. The opposite of CPI inflation is deflation, a decrease in the general price level of goods and services. The common measure of inflation is the inflation rate, the annualized percentage change in a general price index. As prices faced by households do not all increase at the same rate, the consumer price index (CPI) is often used for this purpose. The employment cost index is also used for wages in the United States.

<span class="mw-page-title-main">Monetarism</span> School of thought in monetary economics

Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on national output in the short run and on price levels over longer periods. Monetarists assert that the objectives of monetary policy are best met by targeting the growth rate of the money supply rather than by engaging in discretionary monetary policy. Monetarism is commonly associated with neoliberalism.

This aims to be a complete article list of economics topics:

<span class="mw-page-title-main">Fiscal policy</span> Use of government revenue collection and expenditure to influence a countrys economy

In economics and political science, fiscal policy is the use of government revenue collection and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variables developed in reaction to the Great Depression of the 1930s, when the previous laissez-faire approach to economic management became unworkable. Fiscal policy is based on the theories of the British economist John Maynard Keynes, whose Keynesian economics theorised that government changes in the levels of taxation and government spending influence aggregate demand and the level of economic activity. Fiscal and monetary policy are the key strategies used by a country's government and central bank to advance its economic objectives. The combination of these policies enables these authorities to target inflation and to increase employment. Additionally, it is designed to try to keep GDP growth at 2%–3% and the unemployment rate near the natural unemployment rate of 4%–5%. This implies that fiscal policy is used to stabilise the economy over the course of the business cycle.

<span class="mw-page-title-main">Monetary policy</span> Policy of interest rates or money supply

Monetary policy is the policy adopted by the monetary authority of a nation to affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability. Further purposes of a monetary policy may be to contribute to economic stability or to maintain predictable exchange rates with other currencies. Today most central banks in developed countries conduct their monetary policy within an inflation targeting framework, whereas the monetary policies of most developing countries' central banks target some kind of a fixed exchange rate system. A third monetary policy strategy, targeting the money supply, was widely followed during the 1980s, but has diminished in popularity since that, though it is still the official strategy in a number of emerging economies.

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<span class="mw-page-title-main">Modern monetary theory</span> Macroeconomic theory

Modern monetary theory or modern money theory (MMT) is a heterodox macroeconomic theory that describes currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires. According to MMT, governments do not need to worry about accumulating debt since they can create new money by using fiscal policy in order to pay interest. MMT argues that the primary risk once the economy reaches full employment is inflation, which acts as the only constraint on spending. MMT also argues that inflation can be addressed by increasing taxes on everyone to reduce the spending capacity of the private sector.

<span class="mw-page-title-main">Neoclassical synthesis</span> Postwar academic movement in economics

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<span class="mw-page-title-main">History of macroeconomic thought</span>

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<span class="mw-page-title-main">David I. Meiselman</span> American economist

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References

  1. ↑ "monetarist-fiscalist controversy", Martín Bronfenbrenner, Macroeconomic alternatives , AHM Pub. Corp., 1979
  2. ↑ "Monetarism v. Fiscalism ~ Mike Norman Economics". 22 August 2011.
  3. ↑ "Fiscalism definition".
  4. ↑ "Fiscalism - Who will pick up the gauntlet? - Dirty Economics". Archived from the original on 2018-05-03. Retrieved 2018-05-02.
  5. ↑ "Monetarism v. Fiscalism ~ Mike Norman Economics". 22 August 2011.
  6. ↑ "Monetarism v. Fiscalism". Mike Norman Economics. 22 August 2011.
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