Abstract

Arguments against the Effectiveness of Fiscal Policy A contribution on the controversy between Keynesians and monetarists

On the one hand this contribution emphasizes the temporary character of anticyclical fiscal policy, and on the other it deals critically with the recent arguments of the monetarists against fiscal policy, which are derived from the theory of relative prices. As far as the conventional Keynesian assessment of fiscal policy is concerned, it is evident that if the time factor is neglected, the limitations and risks of such policy are underestimated. Variations of the private and corporate income tax schedules for the purpose of influencing consumption and investment prove to be very problematical. But also purposive temporary measures to influence investment involve substantial uncertainties in terms of trade cycle policy on account of the intertemporal substitution effects and make high demands on accurate timing of the policy. The more recent monetarist thesis that the theory of relative prices contraverts the effectiveness of short-term fiscal, stabilization policy is untenable. Under realistic assumptions regarding both the make-up of anticyclical tax policy (including investment grants) and the structural conditions of government expenditure policy, and making allowance for the temporary character of the measures, the effects of fiscal policy according to the monetarist theory of relative prices are similar to those posited by the Keynesian impact mechanism.