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Talking of elephants – plain old, garden variety fiscal policy

If there were two lessons that can be taken from the GFC among others then we should know, once and for all, that, first, monetary policy (in all its glorious forms these days) is not a very effective tool for influencing the level of economic activity nor the price level, and, second, that fiscal policy is very effective in manipulating total spending and activity. Of course, those lessons provided the evidence that turned macroeconomics on its head because for several decades, as the Monetarist surge morphed into all manner of variants, tried to eulogise the primacy of monetary policy and rejected the use of fiscal policy. There were all sorts of justifications – time invariance, lags, politicians cannot be trusted, etc – but at the heart of the shift towards supposedly independent central banks was the political desire to neuter the capacity of governments to use their currency capacity to advance the well-being of the many, while at the same time, using that same capacity to advance the interests and real income shares of the few. Depoliticisation worked a treat for the top-end-of-town. The problem is that the lessons have not been learned and all manner of commentators still think that monetary policy is the king. Eventually, we will move beyond that but the pain of holding on to the myth is damaging for people, especially those who are without work, are underemployed or have been forced into early retirement by the poor economic performance in this austerity-biased era.

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