A Pragmatic and Proactively Formulated Infinite Life Ever Relevant Fiscal Policy

What is it about?

Seminally, Lucas (1976) and Kydland and Prescott (1977) demonstrate that monetary policy is not robust to the management of a macroeconomy. All of the subsequent formal theoretical and empirical evidence concur with the findings in the two seminal studies. In stated respect, whereas Fischer (1977) finds that monetary policy can be adopted as a 'stabilization policy', as such acknowledges inappropriateness of the adoption of monetary policy as a 'proactive policy', regardless the study reaffirms the possibility, to wit, monetary policy conflicts with proactively formulated fiscal policy. Romer and Romer (2023) concur, find that monetary policy, that is the management of inflation, has induced some 'systemic' damage to each of employment and investments in the United States of America. The two seminal studies go on to show that it is a proactively formulated fiscal policy whose parameters are known to all agents in an economy that is robust to the management of a macroeconomy. The two studies and the studies that then followed have, however, up until my study, not been able to come up with any such policy that is formulated using pragmatic fiscal policy parameters. For illustration, whereas Lucas and Stokey (1983) find that borrowing, that is, debt induces a bonding commitment on government, the question as to what exactly to fund with the debt, which is the essence of proactiveness, equivalently intentionality, is left unanswered, hence the admission, in that study, of some abstractness to study findings. If fiscal policy is pragmatically and proactively formulated, it is required to satisfy the most rigorous specification of the Welfare Theorem, namely it must maintain Pareto efficiency of competition within private sectors and must be inclusive of transfer payments out of taxes from government into the private sector. Transfer payments are a must (see for example, Buchanan 1949), because always there exists the possibility of improvements to the equilibriums that are generated by Pareto efficient competition. The stated possibility has illustration as follows. Suppose the cost of a year's supply of GRITS increases from $1,200 to $1,300. Agent x's salary remains the same, but agent x eats GRITS every year. Relative to the previous year, agent x's savings decrease by $100 because Pareto efficient competition, which I assume, resulted in a new price of $1,300 for a year's supply of GRITS. A transfer payment of $100 from government in the form of a subsidy into agent x's electricity costs restores agent x's savings capacity, and is accompanied by GRITs' manufacturers' capacity for charging, by assumption, an efficient price for GRITS. The subsidy is rational, because agent x is not the source of the competitive equilibriums that emerge in private sectors and the $100, which is out of taxes, is affordable to the government. My study, newly published in the Springer Journal, SN Business & Economics arrives at the very first proactively formulated fiscal policy that explicitly is shown to be infinite lived and ever relevant, and that is formulated in pragmatic terms, that is, is couched in real world fiscal policy parameters. First, my study provides a mathematical parameterization of Pareto efficient competition in private sectors (I do not have any awareness of any other such parameterization in the literature). Second, the 'resulting fiscal policy' does not in any way impinge on the Pareto efficiency of competition within private sectors, rather is directed towards households. Third, none of the parameters of the resulting fiscal policy are premised on market prices, rather all are premised on 'fiscal prices', and fiscal prices are mathematically parameterized. Fourth, the resulting fiscal policy is 'incentive compatible', because transfer payments out of taxes to households increase with the innovativeness of labor; the transfer payments incentivize, as such effort and focus on innovation - innovation, of course is the bedrock of economic development (Schumpeter 1928; 1947). Fifth, whereas Solow (1956, 1957) arrive at the characterization of population growth as either of a limiting or empowering factor for economic growth, hitherto the inference had yet to be transformed into a mathematical boundary condition. My study arrives at a mathematical condition which facilitates inferences as to whether population growth is excessive or within the boundaries that facilitate improvements to the welfare of socioeconomic agents. Sixth, the resulting fiscal policy places emphasis, not only on the innovation of new products, rather arrives, endogenously at the inference, to wit, fiscal policy enhances the efficiency of competition within private sectors if firms are incentivized to incorporate searches for new efficiency into searches for new innovations. In stated respect, it is binding, to wit, households' welfare improve more slowly if innovation does not result in some efficiency savings, that is, if some new innovations are not, in relation to incumbent products, lesser priced. Households have the incentive, as such to exhibit preference for new innovations that are accompanied by efficiency savings, that is, for innovations that facilitate increases to savings and savings capacity. Consider then, consistent with inferences that led to the award of the 1998 Nobel Prize in Economics to Prof. Amartya Sen that a decrease to GDP Per Capita that is the outcome of new innovations that are lesser priced dominates, that is, ought to be preferred to an increase to GDP Per Capita that is the outcome of government largesse.

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Photo by Ibrahim Boran on Unsplash

Photo by Ibrahim Boran on Unsplash

Why is it important?

If fiscal policy generates incentive compatible behavior in an economy, as seminally is motivated in each of Lucas (1976) and Kydland and Prescott (1977), the terms of the resulting fiscal policy are known to all socioeconomic agents. Every period, as such, the resulting fiscal policy influences decision making, that is, influences socioeconomic agents' efforts for the formation of new actions which determine equilibriums to emerge in the next period. Fiscal policy enhances, as such socioeconomic agents' capacity for living with 'intentionality', equivalently for making decisions in the context of 'Rational Expectations'. My study's resulting fiscal policy satisfies said conditions, because first of, all of the parameters easily are understood by the general polity. Second, the recognition, on the part of labor, that innovation generates pecuniary rewards, not only from employing firms, but also from government increases the incentive to engage with the activities of innovation. In stated respect, with fiscal policy a yearly initiative, conditional on satisfaction of the necessary conditions, the resulting fiscal policy facilitates increases to households' purchasing power every year; households have, as such less of an incentive to depend on homeowners equity for increases to their purchasing power; there is arrival, as such at a lower risk of mortgage meltdowns in a socioeconomy. Third, with transfer payments introduced into the provision of social services, it's impact on purchasing power decreases with income levels, exactly the effect that is expected of any redistributive policy that does not do any harm to the richest agents in a socioeconomy. Fourth, with the resulting fiscal policy as the 'basic fiscal policy', there is arrival at a well defined Societal Opportunity Cost (SOC) for any other social projects that are proposed in a socioeconomy. Rather then a resort to private sector parameters, such as the cost of capital within private sectors, for assessments of the welfare enhancing prospects of new social projects - a resort that is fraught with contradictions - assessments of new proposals of social projects are premised on the impact on aggregate future cash flows from either of the maintenance, solely of the SOC, or the redirection of some funds away from the SOC for arrival at two social projects whose anticipated future cash flows feasibly supersede the cash flows from maintenance, solely of the SOC. The availability of a basic fiscal policy, which then has characterization as an SOC, resolves the moral hazard problem that is brought to light in Samuelson (1954), namely if SOCs do not have direct welfare implications for households, because they simply are estimates drawn from the private sector, households have the incentive to misrepresent their preferences for social projects so as to generate some surplus for themselves at the expense of their neighbors. In presence, however, of the basic fiscal policy and it's characterization as the SOC, the SOC is not notional, rather is directly pecuniary; any and every misrepresentation of preferences has, as such a direct effect on the future transfer payments and cash flows to emerge from the totality of social projects; necessarily, as such misrepresentations incur pecuniary costs on the self same deviating agents, as such are dissuaded.

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