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Reorienting Fiscal Policy: A Critical Assessment of Fiscal Fine-Tuning

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  • Pavlina R. Tcherneva

Abstract

The present paper offers a fundamental critique of fiscal policy as it is understood in theory and exercised in practice. Two specific demand-side stabilization methods are examined here: conventional pump priming and the new designation of fiscal policy effectiveness found in the New Consensus literature. A theoretical critique of their respective transmission mechanisms reveals that they operate in a trickle-down fashion that not only fails to secure and maintain full employment but also contributes to the increasing postwar labor market precariousness and the erosion of income inequality. The two conventional demand-side measures are then contrasted with the proposed alternative--a bottom-up approach to fiscal policy based on a reinterpretation of Keynes's original policy prescriptions for full employment. The paper offers a theoretical, methodological, and policy rationale for government intervention that includes specific direct-employment and investment initiatives, which are inherently different from contemporary hydraulic fine-tuning measures. It outlines the contours of the modern bottom-up approach and concludes with some of its advantages over conventional stabilization methods.

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Bibliographic Info

Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_772.

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Date of creation: Aug 2013
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Handle: RePEc:lev:wrkpap:wp_772

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Related research

Keywords: Full Employment; Fiscal Policy; Aggregate Demand; Business Cycles; Income Distribution; New Consensus;

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  1. Thomas Piketty & Emmanuel Saez, 2003. "Income Inequality In The United States, 1913-1998," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 1-39, February.
  2. Pavlina R. Tcherneva, 2010. "Fiscal Policy: The Wrench in the New Economic Consensus," International Journal of Political Economy, M.E. Sharpe, Inc., vol. 39(3), pages 24-44, October.
  3. Pavlina R. Tcherneva, 2012. "The Role of Fiscal Policy," International Journal of Political Economy, M.E. Sharpe, Inc., vol. 41(2), pages 5-25, July.
  4. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  5. Lesley J. Turner & Sheldon Danziger & Kristin S. Seefeldt, 2006. "Failing the Transition from Welfare to Work: Women Chronically Disconnected from Employment and Cash Welfare," Social Science Quarterly, Southwestern Social Science Association, vol. 87(2), pages 227-249.
  6. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
  7. David R. Henderson, 1989. "Are We All Supply-Siders Now?," Contemporary Economic Policy, Western Economic Association International, vol. 7(4), pages 116-128, October.
  8. Stephanie Bell & L. Randall Wray, 2004. "The "War on Poverty" after 40 Years: A Minskyan Assessment," Economics Working Paper Archive wp_404, Levy Economics Institute.
  9. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  10. Wren-Lewis, Simon, 2000. "The Limits to Discretionary Fiscal Stabilization Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 92-105, Winter.
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