Reflections on the Role of Fiscal Policy: The Doug Purvis Memorial Lecture

Abstract

This address - the Doug Purvis memorial lecture for 1998 - evaluates federal fiscal policy over the last 50 years. During the 1950s and 1960s the federal government benefited from high growth and low interest rates; its share of GDP doubled while, on average, the budget was balanced. Things deteriorated in the 1970s and 1980s; the government was confused regarding its objectives, and - with lower growth and higher interest rates - the vicious circle of debt dynamics set in. In the late 1980s, problems were further compounded by an inappropriate monetary-fiscal policy mix. Federal fiscal policy has been a success since 1994, in part because the government has learned some lessons from the earlier years - such as the payoff of restricting attention to at most one or two economic objectives at a time. For the coming 15 years, Dodge recommends small budget surpluses, so that a federal debt-to-GDP ratio of about 35 percent can be reached within that time frame. He further recommends that the government should focus on stimulating private saving and investment, not contracyclical policy, and that further research in the areas of health-care delivery and generalized wage subsidies should be treated as a top priority.