Limits to Monetary Policy and the Enigma of Fiscal Policy

Regarding Ben Bernanke’s testimony 06/07/2012 and the commentary in the video above, monetary policy has reached its limit. Interestingly enough F.A. Hayek, in real-time during the Great Depression (circa 1938), staked out the position that monetary policy has its limitation and made such comment during the other deep recession regarding Federal Reserve actions at the time [1930's].

Fast forward to the Great Recession and we are at the limit of monetary policy once again. It's on the fiscal side at this point and Ben Bernanke keeps stating such in his speeches. Bernanke knows he is at the limit of monetary policy, he just does not say it, likely for policy reasons, yet alludes implicitly and explicitly to fiscal policy again and again.

The problem with fiscal policy is that it's in essence, ever since Keynes advocated politicos manipulating the levers of the economy, "politico policy". Buchanan and public choice theory leads one to the conclusion that reversing or amending fiscal policy threatens political constituency building exercises through taxpayer dollars…..past, present and future. It goes back to Friedman's discussions that political self interest indeed exists. It's related to Robert Higgs "ratcheting up and never ratcheting back".

Stated alternatively, fiscal policy is many times discussed as blackboard economics [Coase] rather than the real world fiscal policy which has unfortunately become politico policy. In the blackboard economic world one merely tweaks fiscal policy to achieve desired economic outcomes. In the real world politico policy is tweaked to achieve the desired political constituency building exercises outcome through taxpayer dollars.

As with limitations of monetary policy, fiscal policy has become riddled with politico rigidities of political constituency building and ideological belief systems [nothing akin to fiscal policy blackboard economics]. Moreover, changes in fiscal policy means belief systems are threatened i.e. threaten the politicos emotional attachment to beliefs they intensely hold regardless of the economics of fiscal policy.

Fiscal policy has become a murky quagmire brought to you by one John Maynard Keynes and his benevolent dictator approach to politicos manipulating the levers of the economy in the public's supposed best interest. Fiscal policy has become politico policy. Rather than the economics of fiscal policy changing and quickly redeployed, politico policy is rigid, slow to change and deployment is delayed or not at all. Fiscal policy/politico policy has become self limiting.