The New Fiscal Policy: Comment

Abstract

The two papers presented today exemplify a tendency to self-denigration among social scientists which threatens dangerously to silence scholarly comment on vital public issues. Because, it is said, we do not know everything, we dare not say anything about important issues. Because our economic forecasts often go astray, those who must make policy might as well ignore them. Our authors today do not go that far, but those who do adopt this extreme position may, I fear, draw comfort from some remarks by Messrs. Worswick and Stein. Mr. Worswick presents powerful proof that recent tests of the effectiveness of fiscal policy, its timing and impact on the economy, cannot really measure what they seek to measure. I am much impressed by his arguments, and have also to second the principal conclusion of his concluding section. The management of aggregate demand, by fiscal and monetary policies, is a vital prerequisite to the establishment of external balance, but is not sufficient to that end. It is not a substitute for an incomes policy or, failing that, changes exchange rates. If, indeed, the fiscal policies of the Labour Government are to be faulted on any ground, it must be because that Government squeezed the toothpaste tube for about two years without taking off the cap. It was too slow to alter the exchange rate, thereby to let out the exports that its fiscal policy was meant to extrude. Mr. Worswick has conducted a lovely marriage of the absorption and elasticities approaches what, one would hope, will be a lasting union. Yet the very strength of his concluding argument makes it more difficult for me to understand his earlier assertion that in appraising the post-war British fiscal policy, as such is a very minor I can best clarify my obiection to that remark by asking where Britain would be now if the pound had been devalued 1964 or 1965, but nothing had been done to damp down aggregate demand. Surely, devaluation would have failed to resolve Britain's payments problems, and one could rightly blame that failure on inadequate concern with the stabilization problem. Our difference here, however, may well be semantic. Let me add, as a final note on Mr. Worswick's paper, a plea for further work on the measurement of errors the application of economic policies. One can avoid a number of the major problems Mr. Worswick had detected recent work on Britain by setting a more modest goal-by seeking to identify combinations of policy instruments than those that were employed, rather than searching for the ideal combination. Straight-forward simulations, using fairly simple macromodels, can probably tell us whether a different set of economic policies would have made for a better balance of payments, less price inflation, smaller deviations from steady real growth or, for that matter, faster real growth itself. This approach is not too different from the one pursued by