Fiscal Policy and Business Cycles

By Alvin H. Hansen | Go to book overview

Chapter XII
PUMP-PRIMING AND COMPENSATORY FISCAL POLICY

MONETARY policy is an important weapon which we cannot afford to dispense with in cyclical compensatory policy. But it has severe limitations and must be supplemented with other methods. This statement must not be interpreted to mean, however, that even a complete arsenal, involving all the known weapons of attack upon the cycle, is really adequate to stabilize a private enterprise economy. While a program of positive action is necessary, and to a degree effective, complete stability is, nevertheless, unattainable.

Cyclical fiscal policy may be discussed under two headings: first, a cyclically adjusted public spending program; second, a cyclically administered tax policy.

The policy of public spending with respect to the business cycle involves a consideration of "pump-priming," in the strict sense in which that term should be used, in contrast with a policy of public compensatory spending as an offset to fluctuations in private investment. It involves, moreover, theoretical consideration of the Multiplier Principle and the Principle of Acceleration. It involves, in addition, a consideration of the types of expenditure most effective in view of the Multiplier and Acceleration principles as instruments to lift the national income, whether through pumppriming or through compensation.

It is important to make a sharp distinction between the pump-priming concept and the concept of compensation.

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