In
macroeconomicsMacroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national or regional economy as a whole. Along with microeconomics, macroeconomics is one of the two most general fields in economics. It is the study of the behavior and decision-making of entire...
, particularly in the
history of economic thoughtThe history of economic thought deals with different thinkers and theories in the subject that became political economy and economics from the ancient world to the present day...
, the
Treasury View is the assertion that
fiscal policyIn economics, fiscal policy is the use of government spending and revenue collection to influence the economy.Fiscal policy can be contrasted with the other main type of economic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money....
has
no effect on
unemploymentUnemployment occurs when a person is available to work and seeking work but currently without work. The prevalence of unemployment is usually measured using the unemployment rate, which is defined as the percentage of those in the labor force who are unemployed...
, even during times of economic
recessionIn economics, a recession is a general slowdown in economic activity over a long period of time, or a business cycle contraction. During recessions, many macroeconomic indicators vary in a similar way...
. This view was most famously advanced in the 1930s (during the
Great DepressionThe Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
) by the staff of the British
Chancellor of the ExchequerThe Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called The Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...
. The position can be characterized as:
Keynesian economistsKeynesian economics is a macroeconomic theory based on the ideas of 20th-century British economist John Maynard Keynes...
reject this view, and often use the term "Treasury View" to criticize this position. The term is sometimes conflated with the related position that fiscal stimulus has
minimal impact on economic activity.
In the late 1920's and early 1930s, during the height of the
Great DepressionThe Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
, many economists (most prominently
John Maynard KeynesJohn Maynard Keynes, 1st Baron Keynes, CB was a British economist whose ideas have been a central influence on modern macroeconomics, both in theory and practice...
) tried to persuade governments that increased government spending would mitigate the situation and reduce unemployment.
In
macroeconomicsMacroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national or regional economy as a whole. Along with microeconomics, macroeconomics is one of the two most general fields in economics. It is the study of the behavior and decision-making of entire...
, particularly in the
history of economic thoughtThe history of economic thought deals with different thinkers and theories in the subject that became political economy and economics from the ancient world to the present day...
, the
Treasury View is the assertion that
fiscal policyIn economics, fiscal policy is the use of government spending and revenue collection to influence the economy.Fiscal policy can be contrasted with the other main type of economic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money....
has
no effect on
unemploymentUnemployment occurs when a person is available to work and seeking work but currently without work. The prevalence of unemployment is usually measured using the unemployment rate, which is defined as the percentage of those in the labor force who are unemployed...
, even during times of economic
recessionIn economics, a recession is a general slowdown in economic activity over a long period of time, or a business cycle contraction. During recessions, many macroeconomic indicators vary in a similar way...
. This view was most famously advanced in the 1930s (during the
Great DepressionThe Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
) by the staff of the British
Chancellor of the ExchequerThe Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called The Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...
. The position can be characterized as:
Keynesian economistsKeynesian economics is a macroeconomic theory based on the ideas of 20th-century British economist John Maynard Keynes...
reject this view, and often use the term "Treasury View" to criticize this position. The term is sometimes conflated with the related position that fiscal stimulus has
minimal impact on economic activity.
History
In the late 1920's and early 1930s, during the height of the
Great DepressionThe Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
, many economists (most prominently
John Maynard KeynesJohn Maynard Keynes, 1st Baron Keynes, CB was a British economist whose ideas have been a central influence on modern macroeconomics, both in theory and practice...
) tried to persuade governments that increased government spending would mitigate the situation and reduce unemployment. In the
United KingdomThe United Kingdom of Great Britain and Northern Ireland is a sovereign state located off the northwestern coast of continental Europe. It is an island country, spanning an archipelago including Great Britain, the northeastern part of Ireland, and many small islands...
, the staff of the Chancellor of the Exchequer, notably
Ralph George HawtreySir Ralph George Hawtrey was a British economist, and a close friend of John Maynard Keynes.He studied at Eton, then Cambridge, where he graduated in 1901 with first-class mathematics honours. He spent the rest of his working life in the study of economics. between 1904 and 1945 he worked in the...
and
Frederick Leith-RossFrederick William Leith Ross was chief economic adviser to the UK government from 1932 to 1945.-Work:In economics, he is known for advancing the Treasury View....
, argued against increased spending by putting forward the "Treasury View". Simply put, the Treasury View was the view that fiscal policy could only move resources from one use to another, and would not affect the total flow of economic activity. Therefore, neither government spending nor tax cuts could boost employment and economic activity. This view can historically be traced back to various statements of
Say's lawSay's law, or the law of markets, is an economic proposition attributed to French businessman and economist Jean-Baptiste Say , which states that in a free market economy goods and services are produced for exchange with other goods and services, and in the process a precisely sufficient level of...
.
Keynes argued against this position, and particularly in The General Theory of Employment, Interest, and Money, provided a theoretical foundation for how fiscal stimulus can increase economic activity during
recessionIn economics, a recession is a general slowdown in economic activity over a long period of time, or a business cycle contraction. During recessions, many macroeconomic indicators vary in a similar way...
s.
Opinions are currently sharply divided on the Treasury View, with different schools of economic thought holding contradicting views. Many in the "freshwater" Chicago school of economics advocate a form of the Treasury View, whereas economists from
saltwater schoolIn economics, the saltwater school referred to the school of economic thought that was developed in the universities and other institutions located near the east and west coast of the United States, such as Berkeley, Harvard, MIT, University of Pennsylvania, Princeton, UCLA, Stanford, and Yale.It...
s reject the view as incorrect.
A number of prominent financial economists (including
Eugene FamaEugene Francis Fama is an American economist, known for his work on portfolio theory and asset pricing, both theoretical and empirical. He is currently Robert R...
) have recently advocated the strong form of this view – that of no possible impact. However, it is categorically rejected by Keynesian macroeconomics, which holds that economic activity depends on aggregate spending (at least in the short run). It is related to, and at times equated with, theories of
Say's lawSay's law, or the law of markets, is an economic proposition attributed to French businessman and economist Jean-Baptiste Say , which states that in a free market economy goods and services are produced for exchange with other goods and services, and in the process a precisely sufficient level of...
,
Ricardian equivalenceRicardian equivalence, is an economic theory that suggests consumers internalise the government's budget constraint and thus the timing of any tax change does not affect their change in spending...
, and the
Policy Ineffectiveness PropositionThe Policy Ineffectiveness Proposition is a new classical theory proposed in 1976 by Thomas J. Sargent and Neil Wallace based upon the theory of rational expectations...
.
Noted macroeconomists such as
Milton FriedmanMilton Friedman was an American economist, statistician and public intellectual, and a recipient of the Nobel Memorial Prize in Economics...
and
Robert BarroRobert Joseph Barro is an American classical macroeconomist and the Paul M. Warburg Professor of Economics at Harvard University. He is among the most influential economists in the world according to IDEAS/RePEc. Barro is considered one of the founders of new classical macroeconomics, alongside...
have advocated a weak form of this view, that fiscal policy has temporary and limited effects. Such a view is not incompatible with Keynesian macroeconomics.
Arguments for
Arguments equivalent to the Treasury View are frequently rediscovered independently, and are often in turn criticized by Keynesian macroeconomists.
Accounting
One line of argument is to use the accounting equations in the
National Income and Product AccountsNational Income and Product Accounts use double-entry accounting to report the monetary value and sources of output produced in a country and the distribution of incomes that production generates...
(NIPA) to say that, as a matter of accounting, government spending must come from somewhere, and thus has no net impact on
aggregate demandIn macroeconomics, aggregate demand is the total demand for final goods and services in the economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. This is the demand for the gross domestic product of a...
, unemployment, or income.
Positions on this argument are far apart: advocates of the accounting argument for the Treasury View argue that as a matter of accounting (by definition) fiscal stimulus cannot have an economic impact, while critics argue that this argument is fundamentally wrong-headed and mistaken.
A Keynesian reply, by Paul Krugman, is that
- ...[this] commits one of the most basic fallacies in economics — interpreting an accounting identity as a behavioral relationship.
That is, NIPA accounting equations hold for a fixed
GDP: the point of fiscal stimulus is to change
GDP, and that changes in government spending are only exactly offset by decreases in other spending or investment if GDP is unchanged. Keynesians argue that fiscal stimulus can increase GDP, thus making this point moot.
Another Keynesian reply, by Brad DeLong, is that these make assumptions about saving and investment, and ignore basic monetary economics, notably
velocity of money300px|thumb|Similar chart showing the velocity of a broader measure of money that covers M2 plus large institutional deposits, M3. The US no longer publishes official M3 measures, so the chart only runs through 2005....
: if velocity of money increases (for a given money supply), (nominal) GDP increases, as GDP = Money Supply * Velocity of Money: a dollar of government spending need not crowd out a dollar of private spending, either as an accounting matter or as a behavioral matter, as it may increase velocity of money.
Economic model
An argument advanced by
Milton FriedmanMilton Friedman was an American economist, statistician and public intellectual, and a recipient of the Nobel Memorial Prize in Economics...
in the converse context (fiscal restraint via tax increases having a braking effect, as opposed to fiscal stimulus having a stimulating effect) begins with the NIPA argument above, then continues from the accounting to an economic model:
- To find any net effect on private spending, one must look farther beneath the surface.
specifically:
- [S]ome of the funds not borrowed by the Federal government may be added to idle cash balances rather than spent or loaned.
- In addition, it takes time for borrowers and lenders to adjust to reduced government borrowing.
concluding:
- However, any net decrease in spending from these sources is certain to be temporary and likely to be minor.
and instead advocating
monetary policyMonetary policy is the process by which the government, central bank, or monetary authority of a country controls the supply of money, availability of money, and cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy...
as the bottom line:
- To have a significant impact on the economy, a tax increase must somehow affect monetary policy–the quantity of money and its rate of growth.
This analysis, while disputed by Keynesians (who argue that the effects of fiscal stimulus are more significant than Friedman argues), is considered a legitimate approach, and not dismissed out of hand as wrong-headed.
Proponents
- Daniel Mitchell of the Cato Institute
The Cato Institute is a pro-free market, libertarian think tank headquartered in Washington, D.C.The Institute's stated mission is "to broaden the parameters of public policy debate to allow consideration of the traditional American principles of limited government, individual liberty, free...
, a supply-side economist, quoted by Caroline Baum in Keynes Revival Makes Cato a Lonely Hearts Club
- Obama’s Job-Creation Program Flunks Basic Math, Caroline Baum, Bloomberg
Bloomberg L.P. is a closely-held financial software, news and data company. It has a one-third share of the market, similar to Thomson Reuters. Bloomberg L.P...
- Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies?, by John H. Cochrane
John H. Cochrane is an economist, specializing in financial economics and macroeconomics. He is the Myron S. Scholes Professor of Finance at the University of Chicago Graduate School of Business.- Career :...
, Myron S. Scholes Professor of Finance, University of Chicago Booth School of Business
- Eugene Fama
Eugene Francis Fama is an American economist, known for his work on portfolio theory and asset pricing, both theoretical and empirical. He is currently Robert R...
, Bailouts and Stimulus Plans
Other