Why the TC Rule (and Nearly All Fiscal Rules) are Less Political than Monetary Policy

Hey, we’re making some progress over here at MR.

Steve Waldman had a great post up a few days ago about fiscal rules. Down in the comments about the TC rule, I got some intelligent push back from people about how this blog was supposed to be less political and more descriptive.

People were rightly concerned when they see me coming out the door here at Modern Monetary Realism, swinging with a fiscal policy rule, which is seemingly…political.

But let’s step back a bit. Let’s take into account Godley’s point:

“Therefore, a necessary condition for the expansion of the economy, at least in the long term, is that the fiscal stance should rise: Government expenditure must rise relative to the average tax rate.”

Now I think we could (?) broaden this theorem a bit, but for now, let’s just accept Godley’s statement at face value.

In plain english, he’s saying:

We must deficit spend if we want the economy to grow.

This isn’t a political statement, or if it is, it’s an extremely mild one. I guess there are some people out there who would  want something like Keynes said was insane:

The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom (Tyler Cowen, I am looking at you)

but only a few crazy people who literally hate civilization want the economy to stagnate permanently and even contract.

What this means is we need to spend. Need to spend. We can’t avoid spending if we like growth. The question switches from “Should we deficit spend?” to “How much should we deficit spend?”

The TC rule is just one of many possible fiscal rules. Clonal pointed out we should use frictional unemployment as the U target.  We can and should have a political discussion about how much to spend.

It seems like the TC rule will point out to us how much deficit spending the economy demands to come to full capacity. There are other ways to decide how much to spend.

But the level of spending is beside the point. The point is we need to spend, we need a government deficit if we want growth. 

This need for spending isn’t political. This is observational.

We should take into account too, the brilliant formulation of S = I + (S – I). This must be – must be – related to the deficits of the TC rule. It’s accounting for Net Financial Assets, and the TC rule gives a suggested government deficit. This Government Deficit (G- T) is definitionally part of Net Financial Assets, which is part of (S – I).

Every fiscal rule proposed is part of S = I + (S -I), because it is a statement in the accounting of NFA.

So how is Fiscal Policy less Political than Monetary Policy? (Excuse the Ben Franklin capitalizations of Important words.)

Well, if my slight expansion of Godley’s observation turns out to be accurate, well, it should be obvious. Because Monetary Policy forces some part of the private sector to become indebted to some other part of the private sector to achieve long term growth.

In other words, Monetary Policy forces there to be winners and losers in our world, and helps to choose them by giving the banking sector special access to the distribution of this policy throughout the economy.

That’s political, very political.


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4 years 3 months ago

So what is the best way for govt to deficit spend without causing excessive inflation? What form of deficit spending is the least inflationary?