Fiscal Policy Cancelling Itself

Fiscal policy is changes in total government spending, and changes in total government financing of that spending (taxes and deficits).

I have no doubts that fiscal policy is a effective at changing the course of the economy. Increases in spending are beneficial. Increases in funding are harmful.† 

A problem is that this is way oversold by politicians and the media. Conveniently, they like to emphasize the good stuff, and de-emphasize the bad stuff. The thing is, you don't get one without the other when it comes to fiscal policy

Keynesians went through great pains to show that the multipliers for spending were ever so slightly larger for spending than for taxing or borrowing, and therefore expansionary policy would actually expand the economy. 

Economists are no longer so sure of this. So typically I assumes as a null hypothesis (until shown otherwise) that the one cancels out the other.

From this perspective, when you hear about how great the "Biden stimulus package" is, you should be waiting for the other shoe to drop. It did this week, in the official form of the much rumored "Biden tax increase", officially named the "Made In America Tax Plan".

As is typical of fiscal policy actions, you can see that the politicians know the thing won't work as advertised, so they're careful to build it the appropriate way. This is because if they taxed you $12.43 and then gave you a Sweet Pork Salad and 32 oz. Diet Coke from Costa Vida ... you'd catch on pretty quick that it was an even trade. So instead they want to give the food to the good guys, and get the bad guys to pay the tax. Usually good guys means people who vote, and bad guys means people who don't. 

There are three ways to do this.

A super easy way is to give stuff to people who can vote, and to have corporations that don't vote pay the tax. That's what's going on here.

A second is to make sure there are a lot more good guys than bad guys. This is where taxing the rich comes in: tax fewer rich people a lot, and spread that money over a larger group of recipients. You'll get a net gain of votes that way.

And third, there's a particularly insidious method. This is to make sure the people available to vote currently get the benefits, and people who won't get to vote until later (children or the unborn) to pay the bill. There's a bit of this with the "Biden stimulus package, where the benefits are paid out over the next several years, and the "Biden tax increase" which has projections showing increased inflows out to 15 years into the future.

† The old-fashioned Keynesian names for these is injections and leakages, and the metaphor was of trying to maintain pressure in a series of pipes. In 1949, a machine was actually built to show this to students. It was called Moniac, and they still have one of these that works in New Zealand. Check it out: