Healthy Fiscal Responsibility, Fiscal Norms Sadly Eroding

Washington Post columnist Megan McArdle recently wrote that the best argument made in favor of limiting the size of the stimulus during the Great Recession — part of a larger conversation about austerity — was one of ethos.

Later that year, Hamilton proposed the establishment of the Bank of the United States. Though not a central bank by today's standards, he thought it crucial for securing federal credit and a stable currency.Since then, the United States and most stable countries have developed norms guiding different kinds of policy behavior. U.S.

Leeper highlights three fiscal norms. One, established in one of Hamilton's 1790 reports, is that budget deficits should be followed by budget surpluses . These expectations, in turn, influence bond prices, inflation and the real economy, keeping things relatively stable. In addition, after the roughly $6 trillion in COVID emergency spending — and unlike the Obama administration post-Great Recession — the Biden administration has not acknowledged the need for austerity.

The breakdown can also affect monetary policy. With federal debt equaling 100% of GDP, most of it financed through short-term bonds, any interest rate hikes dramatically increase the budget deficit. This could affect the Fed's ability and willingness to fight inflation with more rate hikes and further debt increases.

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