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giving the steering wheel a jerk that threatens to send the car off the road."1 |
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For fiscal policy, the appropriate counterpart to the monetary rule would be to plan expenditure programs entirely in terms of what the community wants to do through government rather than privately, and without any regard to problems of year-to-year economic stability; to plan tax rates so as to provide sufficient revenues to cover planned expenditures on the average of one year with another, again without regard to year-to-year changes in economic stability; and to avoid erratic changes in either governmental expenditures or taxes. Of course, some changes may be unavoidable. A sudden change in the international situation may dictate large increases in military expenditures or permit welcome decreases. Such changes account for some erratic shifts in federal expenditures in the postwar period. But they by no means account for all. |
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Before leaving the subject of fiscal policy, I should like to discuss the view, now so widely held, that an increase in governmental expenditures relative to tax-receipts is necessarily expansionary and a decrease contractionary. This view, which is at the heart of the belief that fiscal policy can serve as a balance wheel, is by now almost taken for granted by businessmen, professional economists, and laymen alike. Yet it cannot be demonstrated to be true by logical considerations alone, has never been documented by empirical evidence, and is in fact inconsistent with the revelant empirical evidence of which I know. |
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The belief has its origin in a crude Keynesian analysis. Suppose governmental expenditures are raised by $ 100 and taxes are kept unchanged. Then, goes the simple analysis, on the first round, the people who receive the extra hundred dollars will have that much more income. They will save some of it, say one-third, and spend the remaining two-thirds. But this means that on the second round, someone else receives an extra $ 66 2/3 of income. He in turn will save some and spend some, and so on and on in infinite sequence. If at every stage |
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1A Program for Monetary Stability, (New York: Fordham University Press, 1959), p. 23. |
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