The Role of Fiscal Policy

Abstract

The article evaluates the fiscal policy initiatives during the Great Recession in the United States. It argues that, although the nonconventional fiscal policies targeted to the financial sector dwarfed conventional countercyclical stabilization efforts directed to the real sector, the relatively disappointing impact on employment was due not only to misdirected funding priorities but to an exclusive and ill-advised focus on the output gap rather than on the employment gap. The paper argues further that conventional pump priming policies are incapable of closing this employment gap. To tackle the formidable labor market challenges observed in the United States over the past few decades, policy can benefit from a fundamental reorientation away from trickle-down Keynesianism and toward what is termed here "a bottom-up approach" to fiscal policy. This approach also reconsiders the nature of countercyclical government stabilizers.

Keywords:

• American Recovery and Reinvestment Act of 2009
• countercyclical employment policy
• fiscal policy
• trickle-down Keynesianism