Why Fiscal Policy Doesn’t Work – Because Politicians Are Idiots


There’s that lovely theory out there which insists that governments can control the economy through their use of fiscal policy. Change the amount they spend, change the amount they tax, and the economy can be lifted up out of recession, or it can be brought back from over heating. It works just great in theory and rather less in the real world. What we’d like to know is why – and that’s because politicians are idiots:

During the Great Recession, many prominent economists told us that we needed to go back to using fiscal policy, as if Congress were competent and powerful enough to steer the business cycle. It is neither. Monetary offset (in 2008, 2009, and 2013) has repeatedly prevented fiscal policy in the US from having the expected effect, and as for competence, Congress just embarked on unprecedented fiscal stimulus at a time of 4.1% unemployment. It’s hard to see how any fair-minded observer could conclude that fiscal policy is effective.

OK, we might temper that a little, politicians face some unusual incentives. For we out here, us voters, like something for nothing. More government spending upon us gets our vote. At least, this is true often enough that the bloke promising us we’ll be farting through silk gets elected, the one urging austerity doesn’t. Fiscal policy doesn’t work because we never do get the paring back in the boom times.

In our UK experience we might call this the Polly Toynbee effect. For all her shrieking about austerity now we should recall what she was like back in 2004 etc. Harpying on about how the coffers were full and this really should all be spent on her pet projects. You know, an entire absence of fiscal restraint at the top of the business cycle. Even, an entire rejection of the very idea of fiscal policy itself, that insistence upon more spending at that point in the cycle.

No even casual observer of the way that politics works can possibly believe that fiscal policy actually works. No, changing the politicians doing the spending doesn’t work either for the incentives – and Polly’s shrieking – still exist.