Fiscal Policy

In Chapter 3, I showed that the effectiveness of monetary policy is declining and has been declining for many years prior to the current crisis. If, as argued in this book, the fundamental problem in the world's economy today is insufficient consumption to justify additional investment leading to a surplus of savings (savings sitting idle, funding speculative bubbles, or seeking a return from rent or deception), then no matter how low monetary policy drives the interest rate, production increasing investment will not increase. No matter how cheap you make additional investment, additional investment is not rational if you will be unable to sell what the additional investment produces. In this chapter, I examine the effectiveness of fiscal policy. Unlike monetary policy, government spending is a form of final demand and, thus, has the potential to replace consumption as a buyer of the goods that additional investment produces. However, for the past two decades, inequality in most countries has been increasing causing consumption to fall. Governments, wanting to remain in power, have been increasing government spending in order to replace the falling consumption. This has led to growing government deficits. Growing government deficits tend to dampen business expectations causing investment to decline. This chapter will show that the effectiveness of fiscal policy, like monetary policy, has been declining noticeably…