- Reason Awakes -

Monetary and Fiscal Policy

 

Monetary Policy


The principle role of monetary policy ought to be the maintenance of liquidity and price stability.


Interest rates should not have been kept artificially low, for so long, in the face of the housing bubble. Also, the Fed has created far too much risk of long-term inflation by forcing interest rates to essentially zero levels. 


The portion of the Federal Reserve Act that tasks them with pursuing full employment should be repealed. Full employment should be pursued through other means.


Fiscal Policy, a Balanced Budget Amendment, and an Infrastructure Bank


In extreme circumstances, such as the economic crisis of 2008, there is a role for the government to play, through fiscal policy, to offset a decline in aggregate demand caused by a lack of investor and consumer confidence.


Balanced Budget Amendment


Unfortunately, the economic stabalization role of government is compromised if the public sector operates at maximum levels of deficit spending during normal periods.  If that is the case, then the government’s intervention is likely to be ineffective, because it is obvious that it will be followed, shortly thereafter, by a major contraction in government spending and/or an increase in taxes. Markets have foresight and short-term stimulus will not be able to fool enough people to be successful in that kind of environment.  For this reason, it would be wise to restrict the Federal government to operate with a balanced or nearly balanced budget unless the country is at war or economic growth rates are negative.


It may be difficult or problematic to pass a constitutional amendment to keep federal spending in check. If such a constitutional amendment is not possible, we would favor candidates who support a policy guideline of spending no more than 20% of GDP on all federal government activities, excluding periods of war or declining per capita GDP.


Infrastructure Bank


The infrastructure of the U.S. needs major repair, including highways, bridges, and water and sewer systems.  It does make sense to have an inventory of these kinds of projects ready for investment.  In the event that it is appropriate for the government to increase spending in the face of declining private sector investment activity, this inventory of infrastructure investments will reduce the waste associated with poorly thought out grab-bag stimulus programs like “cash-for-clunkers” or incentives for housing purchases that merely shift demand for a very brief period of time. 


We have one important caveat, in terms of our support for the concept of an infrastructure bank. Spending for these infrastructure projects should not be a way to reward favored groups or regions. In order to be included in the list, a proposed expenditure needs full public vetting, including a review by the Congressional Budget Office or the Government Accountablility Office of its merits. In addition, special restrictions such as those imbedded in the Davis-Bacon Act or requirements to hire union labor or "Buy American" should be excluded for items in the infrastructure bank inventory.

 

 

 


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