Say No to This: America’s Fiscal Norms Are in Decline
Washington Post columnist Megan McArdle recently wrote that the best argument made in favor of limiting the size of the stimulus during the Great Recession—part of a larger conversation about austerity—was one of ethos. “We weren’t spending the money in theory,” she wrote, “or in 1945, when an ethos of fiscal responsibility prevailed. We were spending it in the 21st century, when that ethos had collapsed, so there was a considerable chance that when the good times finally rolled around, no politician would willingly undertake the sacrifices necessary to get the budget back in shape.”
She got me thinking about America’s fiscal norms.
It’s fair to say that the ethos of sound fiscal and monetary policy started with none other than Alexander Hamilton. In his January 1790 Report on Public Credit, Hamilton advocated for fully funded permanent public debt. This report laid the groundwork for a financial system supported by securely backed debt together with commodity money. Later that year, Hamilton proposed the establishment of the Bank of the United States. Though not a central bank by today’s standards, he thought it crucial for securing federal credit and a stable currency. Hamilton recognized the interconnectedness of fiscal and monetary policies.
Since then, the United States and most stable countries have developed norms guiding different kinds of policy behavior. U.S. monetary policy norms have largely evolved through legislative actions, shaping the roles and responsibilities of our central bank—the Federal Reserve—in managing the currency and responding to economic shifts. By contrast, according to University of Virginia economist Eric Leeper, America’s fiscal policy norms have emerged more informally. These have been shaped by historical practices and significantly influenced by Hamilton’s understanding of dynamic economic behavior.
Contrary to monetary policy, which has fairly stable and clear policy objectives (
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