Welfare spending could insulate Americans against not just an economic collapse, but also against any Congressional inability to deal with such a calamity, the Federal Reserve’s second highest ranking official said on Monday.
Vice Chair Stanley Fischer said that social safety net outlays triggered by changing economic conditions play a crucial role for policymakers trying to manage a sharp downturn “because the lags with which policy affects the economy may be relatively long.”
Fischer noted that so-called “automatic stabilizers” can bridge “the lag between a situation developing in which fiscal policy should become more expansionary and the decision to undertake such a policy.”
“There is a great deal of evidence that fiscal policy works well, almost everywhere,” he said.
Prominent automatic stabilizers provided by the US government include food stamps, and jobless and Medicare benefits—anti-poverty programs that American citizens below a certain income threshold qualify for.
Fischer made the remarks in Toronto as part of a broader speech on lessons learned from global financial crises of the past 20 years. He was addressing the International Monetary Conference, a symposium that also featured orations by “Canadian Finance Minister Joe Oliver and other top banking and corporate leaders.”
Janet Yellen’s deputy additionally suggested that any attempt to improve the United States’ “deteriorating” infrastructure would be prudent expansionary fiscal policy, particularly if undertaken soon. He noted that it would be cheapest when “government borrowing costs are exceptionally low”–a situation expected to change soon, given the Federal Reserve Board of Governors’ March announcement that it increased the likelihood it would raise interest rates this summer. Fischer commented that the initiative “would mean a temporary increase in the budget deficit,” but that it would “have positive benefits–both an increase in aggregate demand as the infrastructure is built, and later an increase in aggregate supply as the positive impact of the increase in the capital stock due to the investment in infrastructure comes into effect.”
Fischer did note, however, that “the case for more expansionary fiscal policy” must be weighed against “the consequences of greater debt,” and warned against risky, outsize expenditures that could act as a drag on “future fiscal policy”–purely on financial terms.
“In this regard, government intervention to save banks has in some countries resulted in massive increases in the size of the government debt as a share of GDP, as in Ireland at the start of the Great Financial Crisis, when the Irish government stepped in to guarantee bank liabilities,” Fischer noted. “This process is aptly known as a ‘doom loop’.”
