We believe that there are Several issues that make the theory and practice of fiscal policy controversial and difficult.
First, there is uncertainty as to how fiscal policy should be measured. A generational accounting approach, such as the one taken by Laurence Kotlikoff, would focus on the lifetime tax burden born by different age cohorts.
Second, lags in the recognition of the need for a policy change, the design of a new policy, and the implementation of a new policy may render fiscal policy too ponderous to be timely.
Third, private sector expectations may thwart fiscal policy. According to a 2003 article published by Alan Auerbach in Brooking Papers on Economic Activity, "tax changes known to be temporary, for example, are likely to have different affects than those that are permanent"
. Finally, fiscal policy makers may not be able to resist the temptation to renege on tax and spending promises in order to realize short-term gains.
According to Edward Prescott’s 2004 work, this time inconsistency problem may cause more damage to the economy in the long run because the private sector may lose confidence in the government.
How do you feel about this?