The following is a reasonable summary, in my view, of the available evidence on the impacts of discretionary fiscal and monetary policy actions taken before, during, and after the recent financial crisis:
The available evidence…casts grave doubt on the possibility of producing any fine adjustments in economic activity by fine adjustments in monetary policy....and much danger that such a policy may make matters worse rather than better…The basic difficulties and limitations of monetary policy apply with equal force to fiscal policy.
Political pressures to ‘do something’ …are clearly very strong indeed in the existing state of public attitudes.
The main moral to be had from these two preceding points is that yielding to these pressures may frequently do more harm than good. There is a saying that the best is often the enemy of the good, which seems highly relevant. The attempt to do more than we can will itself be a disturbance that may increase rather than reduce instability.
But this is not actually my summary; it is Milton Friedman’s summary of the available evidence 52 years ago (as presented in testimony to the Joint Economic Committee in 1958 and quoted later in his famous debate with Walter Heller, published in Monetary vs. Fiscal Policy: A Dialogue, W.W. Norton, 1969, p. 48.)
The same issues, again and again. How little things have changed.
