Brunner on Fiscal Policy

“The activist argument implicitly assumes that policymakers do possess reliable and detailed knowledge about the dynamic properties of the economy. Such knowledge would certainly allow the pursuit of an effective fiscal intervention. But such knowlege, while necessary, is not a sufficient condition for socially successful fiscal activism. We still need to invoke a goodwill or public-interest theory or benevolent dictator view of government. The case for fiscal activism, at least for purposes of stabilization policy, thus involves two important empirical assumptions bearing on required information and the behavior of man in political contexts . . . We lack the needed detailed and reliable knowledge about the economy’s dynamic structure . . . The consequences of this information problem are reenforced by the fact that self-interested behavior also permeates the political environment. There is little evidence that political agencies operate according to a generally recognized social welfare function. Fiscal activism produces, under the circumstances, more problems.”

— Karl Brunner, “Fiscal Policy in Macro Theory: A Survey and Evaluation”, 1986

3 responses to “Brunner on Fiscal Policy

  1. Oh how true. A copy of this will be taped on my office door in a couple of minutes. Thanks Josh.

  2. Hayek — call your office!

  3. Agent Continuum

    Well, this is an argument against fine-tunning but it doesn’t apply in environments where the need for stimulus would be, as people will claim, self-evident.

    Do you need fiscal stimulus at 6% unemployment? Who knows?! Do you need it at 10%? Probably yes.

    There is uncertainty re: the size of the output gap, but in moments like these the confidence interval does not straddle zero.

    (There, my contrarian comment for the day!)

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