The Jackson Hole conference featured a noteworthy paper by Eric Leeper, a professor from Indiana University, on the economic foundations of fiscal versus monetary policy. While he characterizes the latter as science, he calls the former alchemy. The selection of this paper comes across as backlash against the first bout of critique of the economic profession which was directed against monetary policy by the Greenspan ear. Now it is the turn for fiscal policy.
Leeper's paper highlights some undoubted facts, such as that monetary policymakers are backed by an army of economists producing impeccable scientific work about monetary policy. Fiscal policymakers can only dream of that in their ministries. (Yet, it takes wonder why others, for instance professors like himself, have not filled that void which would promise higher returns on scientific insight than the crowded field of monetary economics.) Leeper's core hypothesis is that the alchemy results in fiscal policy that is arbitrary and fails to anchor expectations.
While his analysis of fiscal policymaking reads somewhat biased, I rather challenge the foundations of his thinking. (It is more fun.) First, how relevant is it to anchor agent's expections? And second, there are significant differences between monetary and fiscal policy.
On the first, Leeper omits to provide a definition for anchoring "fiscal expectations" in analogy to expectations over the future price level that central banks are trying to influence. In monetary policy, an anchor is crucial in presence of fiat money. Fiscal policy is anchored by hard bounds, such as the debt capacity (in presence of an independent central bank). And if the underfunding (or the expected sky-high public debt accumulation) of public pension schemes is an example of unanchoring "fiscal expectation", I wonder what the economic significance is: even if agents save more of their disposable income in expectation of the state walking away from their pension obligations, is the effect so much different from a government that anchors expectations by fixing the problem? Such government would likely tax the disposable income higher (reducing the agent's propensity and ability to save) and, well, save it.
On the second, Leeper is pretty sloppy in going over the essential differences between monetary and fiscal policymaking. There is no "inherent symmetry", or at least Leeper plays down their differences. Most importantly, many monetary policymakers enjoy what has been coined "central bank independence", a luxury a finance minister can only dream of. Fiscal rules, an institutional setting that limits the discretion of fiscal policymakers, are a substitute. Fiscal rules may be imperfect, but they are on the rise (see for instance this IMF paper). Similarly important, fiscal policy is a tool of public policy which pursues multiple objectives; monetary policy pursues one or two. The "morass" of scientific knowledge about fiscal policy may be a reflection of its manifold objectives. Maybe this is a merit rather than a stain on the fiscal policy profession. The concern about distributional effects is a key consideration in fiscal policy. On this account, monetary policy research has so far has looked the other way (aside from research on inflation and poverty in less developed countries). And ultimately, fiscal policy enjoys a myriad of tools, as opposed to (traditional) monetary policy. In the vein of distributional effects, it is not necessarily a fiscal "flip flop" when outlays for unemployment benefits during a slump are later refinanced from higher taxes for the top income bracket, such as in the UK.
Altogether, Leeper puts the spotlight on deficits in rigorous fiscal policymaking. That is fair, and more resources ought to be devoted to it. But it is not fair to call it alchemy at times where monetary policy is entangled in colossal experiments by itself.
