Fiscal policy is most effective in times of emergency, when there are unemployed resources due to a fall in aggregate demand, and when the economy needs an immediate short-term boost. In contrast, fiscal policy is not usually a good means of boosting long-term growth.

Even for macroeconomic purposes, fiscal policy sometimes doesn’t work. “Crowding out”—the replacement of private spending by government spending—sometimes means that fiscal policy isn’t very effective. Furthermore, if people worry a great deal about their future tax burdens, fiscal policy driven by tax cuts will not be very effective. Most important, most changes in government spending aren’t big enough, or quick enough, to have significant and positive macroeconomic impact.

Other forms of fiscal policy are less visible. Automatic stabilizers, built into the tax and transfer systems, help to stabilize aggregate demand.

Some countries, especially some of the world’s poorer countries, take fiscal policy too far. They accumulate very large levels of debt. The finances, currencies, and sometimes even the governments of those countries become unstable. Even if good fiscal policy doesn’t always do a lot of good, bad fiscal policy can do a great deal of harm.

404