Jesse Horwitz recently asked me whether there would be better distributional effects from using fiscal policy rather than monetary policy as a stabilization tool. The intuition is that monetary policy involves the purchase of financial assets whereas fiscal policy can directly deliver money to the public.
I don’t see any important distributional differences, and I believe my view is pretty widespread among economists. But I notice that lots of non-economists see things differently, and it’s worth asking why.
The first thing to note about fiscal policy is that it does not involve the creation of new money, rather it takes existing money and moves it around. When the government sends you a check, the money comes from taxes or borrowing. The public as a whole doesn’t have more money, rather the money is moved from Peter to Paul.
The perception that fiscal policy is fairer may come from the fact that fiscal spending can redistribute money from the richer half of society to the poorer half of society. But that sort of redistribution is essentially unrelated to the use of fiscal policy as a stabilization tool. Even governments that do not use fiscal policy as a stabilization tool often have a welfare state—but they don’t vary the size of the welfare state as a tool for reducing the business cycle. Instead, they often rely on monetary policy.
I suspect that some people mistakenly view fiscal policy as being fairer because they conflate the existence of a fiscal stabilization regime with expansionary fiscal policy. But stabilization policy necessarily uses both expansionary and contractionary policy. An expansionary policy occurs when policy is more expansionary than average and a contractionary policy occurs when policy is less expansionary than average.
It’s true that the national debt trends upward over time, which may lead to the impression that expansionary policy is more common than contractionary policy. But the national debt will trend upward over time regardless of whether fiscal policy is actively being used to stabilize the economy. In the late 2010s, the federal government expanded the national debt to take advantage of the trend toward lower interest rates, not because we were in a recession. If the average (cyclically adjusted) budget deficit is $X, then an active fiscal stabilization policy expands the deficit above $X when stimulus is needed and runs a deficit below $X when stabilization policy calls for reduced spending. In this framework, there is no such thing as permanently expansionary stabilization policy.
Economists tend to think of fairness issues in terms of the long run distribution of income. It’s not obvious why either fiscal or monetary stabilization policy would have any long run impact on income distribution. Even if the government does not use fiscal or monetary policy to stabilize the economy, there will be a government budget and there will be a money supply. In most cases, both will trend upward over time. It is certainly possible that the mere existence of a government budget has distributional effects, and perhaps even the existence of a money supply has distributional effects. But it’s not obvious (at least to me) how varying the money supply or government spending in a countercyclical fashion would have any important distributional effects.
The Fed’s balance sheet has greatly expanded in recent decades, even as a share of GDP. (I wish we had stayed with the much smaller pre-2008 balance sheet.) But this balance sheet expansion was not due to expansionary monetary policy, rather it reflects the Fed’s shift to a floor system with the payment of interest on bank reserves, and also the declining trend in NGDP growth (which reduces interest rates and raises the demand for base money.). Prior to 2008, the Fed ran a very active stabilization policy without buying lots of financial assets. The two issues are essentially unrelated.
PS. I’m not arguing against so-called “automatic stabilizers”, which cause the budget deficit to move somewhat countercyclically even without an active fiscal stabilization policy. But active stabilization policy is best done by the monetary authority.