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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 equality. 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.

Suggested Citation

  • Pavlina R. Tcherneva, 2013. "Reorienting Fiscal Policy: A Critical Assessment of Fiscal Fine-Tuning," Economics Working Paper Archive wp_772, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_772
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    Cited by:

    1. Jeffrey Sommers & Rachel Hegland & Patrick Delices, 2018. "American Public Policy and Full Employment: The Imperative of Martin Luther King’s Political Economy in the 21st Century," SAGE Open, , vol. 8(3), pages 21582440188, September.
    2. Esteban Cruz-Hidalgo & Dirk H. Ehnts & Pavlina R. Tcherneva, 2019. "Completing the euro: The euro treasury and the job guarantee," Revista de Economía Crítica, Asociación de Economía Crítica, vol. 27, pages 100-111.

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    More about this item

    Keywords

    Full Employment; Fiscal Policy; Aggregate Demand; Business Cycles; Income Distribution; New Consensus;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

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