Is Fiscal Policy Dead?

Abstract

The title of this paper poses in stark form the nature of the challenge by the Friedman monetarists to the neo-Keynesian proponents of discretionary fiscal policy, the fiscalists. At issue is not only monetary versus fiscal policy but policy by rule as opposed to discretion, the position of not only the neo-Keynesian Fiscalists but the so-called weak Monetarists.' Thestrong Monetarists, apparently inclined to work in pairs, are represented most prominently by the teams of Friedman and Schwartz, Friedman and Meiselman, and Anderson and Jordan; the Fiscalists, by a large heterogenous group including, to mention a few, Walter Heller, Paul Samuelson, and a score of others identified with various dynamic econometric GNP and economic growth models currently in vogue. My contention is that the concentration on stabilization policy by both Fiscalists and Monetarists, and the debate over the relative efficacy of each, has led to the exclusion or neglect of important goals which ought to be the proper concerns of fiscal policy, particularly by criteria. This would elevate to equal status with stabilization such considerations as resource allocation, income distribution, the structure of prices, social costs, the quality of the environment etc. The direction in recent years of the debate over and the research on fiscal and monetary policy has brought to the center of the stage issues which make it particularly appropriate and timely for an assessment of evolutionary or institutional elements in fiscal policy, the original intent of this paper. First, recent work on the variability of the velocity of money raises anew questions about economic behavior assumed away by the Friedman-Schwartz-