Only the Fed can do major "fiscal policy"
By Scott Sumner
Some people argue that monetary policy is actually fiscal policy, as monetary actions have implications for the federal budget. Printing money creates seignorage, and buying assets (even Treasury bonds) exposes the central bank to the risk of a decline in asset prices.
That reminds me of when people tell me “everything’s political”. Well, thanks for clearing that up; now I know that saying something is political conveys precisely zero information. If monetary policy is actually fiscal policy, then telling me that you favor “fiscal policy” is no different from telling me that you are a Friedmanite monetarist.
I don’t regard monetary stimulus as fiscal policy regardless of whether the Fed is buying Treasury bonds or common stocks. Fiscal policy is expected to lead to higher future tax liabilities; monetary stimulus is not expected to do so. That’s a massive difference.
But I don’t want to argue semantics; let’s argue something consequential. Let’s say we need a lot of “fiscal” stimulus, and we need it quickly. Who’s able to quickly inject another $20 trillion in to the economy tomorrow? And if the Fed asked Congress for permission to buy a wider range of assets in a crisis, does anyone seriously believe that Congress would say no? Heck, Congress gave into the Fed in October 2008 when they asked permission to adopt a highly contractionary monetary policy tool—interest on reserves—in the midst of a horrendous recession.
So if the Fed really wanted to, they could buy $50 trillion in assets tomorrow, or at least the day after Congress gave them permission. How about the other “fiscal policy”? Given gridlock in Congress, do you think the Dems and GOP can agree on whether it should be a tax cut or a spending increase? And how big? Fifty billion? A hundred billion? And how long would that take?
If you favor “fiscal policy”, you should be calling for the Fed to do what I call monetary stimulus and what you call fiscal stimulus. It’s our only realistic hope for stimulus.
PS. I’m not advocating the Fed buy common stock; I don’t think that’s needed. I’m advocating the Fed ask Congress to give it permission to buy a wide range of assets, if there aren’t enough Treasuries and mortgage-backed securities. (There are enough.)