Capitalism and Freedom Chapter Summary & Analysis - Chapter 5, Fiscal Policy Summary

Chapter 5, Fiscal Policy Summary and Analysis

An oft-used rationale for government power is that extra government spending is needed to reduce unemployment. However, this failed in the Great Depression and there is no reason to expect that it will succeed today. Debt was supposed to finance greater consumption which would lead to more employment, but theoretical analysis has discredited it.

Today government spending is defended on the grounds that it "balances" the economy and that it should rise to stabilize total expenditures. However, this is absurd, because a true balance would have government spending shrink when private spending increased. This rationale has allowed government expansion to proceed unabated and prevented a reduction in taxes.

The federal government's spending now has large effects on the economy, but the economy could be stimulated in the private sphere. Even if the balance-wheel theory were true, the wheel could turn the other way. However, in any case, the "balance-wheel"...
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