Fiscal and monetary actions taken by the federal government are effective in offsetting cyclical swings in the economy, but by themselves, stabilization policies are not "enough to ensure overall economic stability," a congressional study released yesterday concluded.
The study was a "first," since despite the decades of government intervention in the economy, no one has ever studied what actually happens to the economy because of tax cuts, spending increases or cuts, or tightening or loosening the money supply.
The study, covering major fiscal policies from 1962 to 1976, was funded by the House Budget Committee and the Joint Economic Committee at the suggestion of Nancy Teeters, a former economic analyst for the Budget Committee who now is on the Federal Reserve Board.
Two econometric services, Data Resources, Inc. and Wharton Econometric Forecasting Associates, Inc., were asked to look at government actions during that period and try to compare it to what might have happened if the government stayed "neutral."
Fiscal policies do work and are effective as countercyclical measures, but:
Even under neutral policy conditions, the hypothetical performance of the economy appeared to have a cyclical element; merely stablizing the government sector is not in itself enough to ensure overall economic stability."
"Stable policies are not able, in themselves, to make more than a small and slow improvement in the inflation-unemployment tradeoff."
Rep. Richard Bolling (D-Mo) Chairman of the Joint Economic committee said the study showed that while the federal government could play a "minor role," its "influence was marginal" on the economy.
The study found that while major actions, such as a 1964 tax cut, "helped restore the economy to full employment in less than a year and a half with only a moderate rise in prices," continuing "over expansionary" policies after the 1964 tax cut "contributed to the excess demand pressures of the sixties."
The study also says excessively restrictive fiscal and monetary policies in the late 1960s were a costly mistake. The runup in the unemployment rate in the 1970 recession is less severe under stable policies.
"The implications of the findings are clear," the study says, "while most of the policies produced desirable short-term effects, a long-run perspective was lacking." Even "the stable framework path suggests that economic instability will not be solved by simply stabilizing the government sector."