Monetary and fiscal policies offer useful tools to influence economic growth, promote full employment and keep inflation in check. While each is invaluable in stabilizing economic activity, monetary policy possesses some unique advantages not available to fiscal policy.
Fiscal policy inevitably involves borrowing money. Whether the money is wisely spent is another matter, but as the country continues to borrow, the debt continues to grow. Monetary policy does not add to the debt. When the Fed wishes to raise interest rates and slow the economy it can do so without impacting the debt. Likewise when it wishes to stimulate the economy its actions have no impact on the debt.
One of the major tools of fiscal policy is the government's ability to borrow money. When the federal government borrows, it competes with businesses and consumers who also borrow money -- businesses invest in buildings, equipment and property and consumers buy cars, houses and other consumer durables. The increased demand from the government for borrowed funds can potentially raise interest rates and crowd out others who do not wish to pay the higher rates.
Elected federal officials are all accountable to the public. Since they were placed in office by the electorate, they must be responsive to the voters if they are to keep their jobs. Consequently, fiscal policy has an element of political expediency. Monetary policy is designed to be different. The Board of Governors of the Federal Reserve is appointed by the President and confirmed by the Senate to serve 14-year terms. The rationale for the long terms is that the Governors should be insulated from political pressure. They have the expertise and the security to do what is best for the country even if it is not politically popular. William M. Martin, Chairman of the Board during the 1950s and 60s, once commented that his job was to “take away the punch bowl just when the party gets going.”
One of the drawbacks of fiscal policy is the time elapsed between the recognition of the need for action until it actually happens. The need is discovered, Congress debates it, different versions of a bill must be reconciled between the House and Senate, the President must sign the bill into law and then the law -- spending or taxing -- is implemented. Even then time is required for the desired effect to take place. Monetary policy can be implemented quickly. The Board of Governors can make quick decisions. The Federal Open Market Committee, a major policy-making part of the Fed, can, too. Their autonomy gives them freedom not granted to elected officials. And when decisions are made, action is immediate.
Thomas Metcalf has worked as an economist, stockbroker and technology salesman. A writer since 1997, he has written a monthly column for "Life Association News," authored several books and contributed to national publications such as the History Channel's "HISTORY Magazine." Metcalf holds a master's degree in economics from Tufts University.