by RICHARD A. MUSGRAVE Division of Research and Statistics, Board of Governors
Through a decade and a half of depression finance and wartime expansion, there has been a growing, if hesitant, recognition of public finance as a powerful instrument for maintaining a high and stable level of income. In this first essay the general role of fiscal policy in the postwar economy will be appraised and some basic aspects of fiscal planning will be considered.
Government expenditure, tax, and debt policies are of strategic importance to prosperity, because through them public policy affects the level of total demand in the economy. As such, budget policy is a vital factor, quite apart from the intrinsic merits of specific expenditure programs or the equity of specific revenue measures. Budget policy is bound to be a matter of broad economic policy.
Total Expenditures and Level of Employment. Production, employment, and hence income in a private enterprise economy depend upon the existence of the necessary markets. Unless prospective market demand appears sufficient to businessmen to pay for the costs of production and to leave an adequate profit, production will not be forthcoming and resources will be unemployed, as was the case to varying degrees during the thirties. And similarly, unless market demand remains within the limit of available supplies once a high level of employment has been reached, prices will be driven up and inflation will threaten. The key to economic prosperity and stability therefore is to secure and maintain a sufficiently high but not excessive level of expenditures, public and private.
This general requirement is clear cut, but its fulfillment is by no means simple. Policy considerations must begin with the basic fact that there is no self-adjusting mechanism, in a private enterprise economy, which assures that a full employment level of expenditures will be maintained year in and year out so that neither inflation nor deflation will develop.