How Important Is Budget Surplus?: The writer is Business and Financial Editor of The Washing
IF YOU LISTEN to Milton FriedmanÛÓ and more and more economists and official!' today arc doing soÛÓhe will tell you that, fiscal policy (the level of tax and spending totals) is unimportant. The only relevancQ, of fiscal policy, soys Friedman, Is the In-: fluence lit brings to bear on the seven goyT, ernors of the Federal Reserve System, who set monetary policy, which he says is al^. important.</br></br>To put his point concretely: In early and mid-1968, all of the Keynesians still running, the Johnson economic team pul their faith in a 10 per cent surtax, generating a shift</br></br>Congress put through the tax, and there was a reversal of fiscal policy that produced a $3.1 billion surplus in fiscal 1969, a stunning change from a deficit of $25.2 billion in fiscal 1968. Taking the two years together, that was a net toughening of fiscal policy by $28.3 billion.</br></br>But we know now that it didnÛªt, even with an extension of the surplus to a projected $5.9 billion in fiscal 1970.</br></br>Why? Because, Friedman will tell you, whatever anti-inflationary effect the surcharge had, it was more than counter-balanced when the Federal Reserve decided in mid-1968 that the money supply had to be expanded to prevent ÛÏoverkill.Û It was one of those classic, egregious mistakes on which the Federal Reserve seems to own a patent.