Here we’ll cover a few potential shortcomings of Fiscal Policy.  The first we’ve addressed elswhere.  Expansionary fiscal policy does result in an expansion of the national debt.  Much of this is internal to the United States and therefore matters only in that it affects long-term planning due to potential for tax increases, spending reductions, and/or inflation. 

Another significant problem with fiscal policy is the inherent difficulty in changing the federal budget.  Changes in spending and tax policy requires an act of Congress and presidential approval.  Consensus is becoming harder to realize in the United States and so by the time a policy is agreed upon, the need may have already passed.  The one exception to this is what are known as “automatic stabilizers”.  During an economic contraction, unemployment compensation and other social service expenditures automatically increase.  Likewise, the lower income decreases average tax rates due to the graduated tax rate schedule in the United States. 

A final argument levied against the use of expansionary fiscal policy is the concern that the requisite borrowing will drive up interest rates and so be offset by a decrease in investment spending by business.  Despite its elegance, there is no evidence of a relationship between the size of government borrowing and interest rates.  If there is an issue, it relates to the value of the US Dollar relative to foreign currencies.  The increase in borrowing might cause an increase in the value of the US Dollar as foreigners seek to lend Dollars to the US government.  The higher valued Dollar might reduce export sales as the foreign denominated price of US goods will have gone up.  This argument is beyond the scope of this course though and so will be left to another.