Macroeconomics—Is It Still Helpful in an Age of Scarcity? - Economics and Ecology: United for a Sustainable World - page 108

of the Treasury Department. Whereas fiscal policy is the bailiwick of the
government, monetary policy is the purview of the Fed, acting as an inde-
pendent, quasi-public entity, which is actually owned by its member banks.
Whereas fiscal actions are necessary to operate the business of government
(meet salaries, make committed expenditures, etc.) and are only secondarily
an instrument of economic policy, monetary policy actions by the Fed are
done strictly for purposes of attempting to control or direct the economy.
According to Keynes, the broad-brush prescription for dealing with an
overheating “boom” phase of the cycle is for government to tax at a surplus
greater than public-sector spending (i.e., reduce the government debt) and
for the Fed to engage in restrictive monetary policy that indirectly restricts
the money supply—the direct control of which is actually in the hands of pri-
vate member banks as they make loans and extend credit to businesses and
individuals. Such actions will serve to dampen the level of economic activity,
control the financial sector, and consequently hold down inflation.
In a recession or trough, the prescription is the opposite. The Fed should
attempt to lower interest rates, ease terms of credit, and take actions that
would stimulate monetary expansion and borrowing for purposes of sup-
porting higher levels of business activity. In such an environment, inflation
is presumably less of a problem than is unemployment and the need to create
jobs. Therefore, the fiscal policy called for in recession is for government to
spend more than it takes in through taxes (increase the public debt), which
injects new demand into the ailing economy.
This process of dealing with recession should, according to Keynes and his
followers, be called “pump-priming,” because the perceived problem is that
the private-sector economy has temporarily inadequate levels of demand for
goods and services. Accordingly, the government would fill the gap through
spending on public works, which would stimulate the private sector to
resume investing, spending, and creating jobs, after which the government
could retire the debt as the economy pulled out of the trough (and headed
toward another boom period?).
The entire process is termed compensatory financing, , or countercyclical eco-
nomic policy , because the role of public policy can be seen as a monetary
mechanism with which to stabilize or counter the direction that an innately
volatile and unstable (though hopefully vibrant), private, capitalistic market
economy will head if unchecked. An astute reader should have no trouble
perceiving that the operational questions, loaded with huge political implica-
tions, become the following: How much government control is too much? and
Who in the government knows how to do the right thing at the right time?
In theory, although some level of federal debt exists, it should not increase
permanently if the private-sector economy (despite understandable, cyclic
fluctuations) retains its overall long-term health. In practice, as our current
economic malaise indicates, getting out of the trough of recession has his-
torically proven more difficult than dampening the peaks. One way of put-
ting this is the homely expression, “You can pull on a string, but you can't