I’ve put DeLong's words in colour.
In this article he claims . . .
“The principal argument for monetary policy is that, by modifying
asset supplies and thus asset prices, it induces households and businesses to
boost their spending on things that they almost bought anyway. Thus–for
marginal policy shifts, starting out at a first-best optimum, and if the
relative distribution of wealth corresponds to social welfare (or if questions
of the relative distribution of wealth are left to a more openly political
process and walled-off from technocratic macroeconomic questions of
stabilization policy)–monetary policy will not push you far away from the
free-market optimum."
The answer to that is that given the VAST AMOUNTS borrowed by
governments, and the attempts to reduce the interest raising effects of that by
having central banks buy back almost equally vast amounts of debt, it is very hard to say what the “free-market”
rate of interest would be, absent the government bull in a china shop.
But let’s assume that the bull in the china shop does
permanently raise or lower interest rates.
Come a recession, governments try to effect an ADDITIONAL
distortion: they implement interest rate cuts and/or QE. But that distortion is
unwound come the recovery. The result is that the economy is distorted towards
the production of investment items: a distortion which has to be unwound come
the recovery. And that policy involves obvious inefficiencies: e.g. trying to
shift labour to investment related activities and back again, come the
recovery.
DeLong continues . . .
“Fiscal policy, by contrast, works through expanded
government purchases ΔG.”
No it doesn’t: it works through EITHER “expanded government
purchases” AND/OR tax cuts (i.e. expanded private purchases).
DeLong continues . . .
“These must be financed by distortionary taxes to amortize
the debt in the future. These taxes do drive a wedge between the social and the
private values of output in the future. And what the government buys is
determined by a political rather than by an optimizing economic logic”.
The answer to that is that taxes do not have to be
distortionary. For example a uniform sales tax on ALL ITEMS purchased by
households would not be distortionary: it would not change the RELATIVE PRICE
of the various items purchased by households.
As to deLong’s objections to the shape of the economy being
determined by “political rather than optimising economic logic”, the assumption
that an unfettered free market brings some sort of flawless or “optimum” or
quasi nirvana type society is plain bizarre. That is a society in which no
taxes are collected to fund the maintenance of law and order, so you’d get
anarchy, or something of the sort.
It would be a society which collected no taxes to fund
defence and which thus made no attempt to defend itself against foreign
aggressors. Not even the most right wing pro-free-market Republican would
approve of that. It would be a society in which the children of the feckless
were not taught to read and write. That doesn’t sound like “optimum” to me (which
is not to deny there is a fair amount of waste and distortion resulting from
government activity).
Conclusion.
Monetary policy distorts, whereas fiscal policy does
not necessarily distort. And even where fiscal policy DOES DISTORT, that is not
necessarily wrong: the latter distortions result from decisions taken by democratically
elected governments – decisions taken because it is the view of such
governments and electorates that we’re all better off if “political logic”
overrides “economic logic”.
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