Friday, January 18, 2008

Why Fiscal Policy is Better

. Friday, January 18, 2008

Mankiw poses an important question for policymakers regarding current enthusiasm for a fiscal stimulus:

"If the economy now gets the fiscal stimulus being proposed (about 1 percent of GDP), does that mean that the Federal Reserve will cut interest rates less than it otherwise would?"

He continues, "If the answer ... is Yes, then ask, How much higher will interest rates be kept as a result of the fiscal stimulus? And is it really better to have a fiscal stimulus and higher interest rates than a smaller deficit and lower interest rates?" (This is a rhetorical question, in case you are unclear, to which the answer is certainly, "no, it is not really better to have a fiscal stimulus and higher interest rates). Update: Mankiw answers the question.

He does not define what he means by "better," but I imagine he conceptualize this in purely economic terms. But, in political terms, the answer is quite different. It's hard for politicians seeking re-election to mail a lower interest rate to voters. Many of them will never even know it has occurred. How can politicians capitalize on their largesse? It's quite easy, however, to send a fiscal stimulus, and when it arrives, voters thank the sender.

So, although monetary policy may be easier, and perhaps even better in economic terms, fiscal stimulus is clearly better in political terms. Sending checks is especially terrific if you can send them to some voters and not to others.


Why Fiscal Policy is Better




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