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SFC Dialogue | Rational Expectation Leader Sees Irrationality in US Fiscal Policy

Rational expectation is often thought of as a school of economic thought and there have been criticisms on the lagging monetary policy and fiscal deficits. Are monetary and fiscal policy in the US rational or not?

Thomas Sargent, the 2011 Nobel Laureate in Economics and New York University Economics Professor, had a Dialogue with SFC journalist recently. As a leader in the field of macroeconomics and the rational expectations revolution, Sargent said, "the way monetary and fiscal policy are created in the United States is not done by a rational social planner. "

"It's more like various parties playing a game of chicken," he added. "American fiscal policy, tax and expenditure policy are not consistent and not coherent. Right now we have our government fiscal policy that has low taxes and high expenditures. And those do not fit together. "

Commenting on the way the US government is operating now, Sargent took an example. "One party is saying 'I'm going to want expenditures high.' And you will eventually have to default on your debt or increase taxes. The other part is saying 'no way I'm going to increase taxes.' And so later you're going to have to cut expenditures or default on the debt. That's arithmetic. And is it a sensible way? Would a rational planner set things up that way? No."

In terms of the possible consequences, Sargent said, "the only way they fit together is if our government debt keeps growing and it can't grow indefinitely. So eventually it's going to have to stop growing."

"And then one of three things is going to have to happen," he emphasized. "Government expenditures are going to be cut. Taxes are going to have to increase, or the US government is going to default on a bunch of debt. That's arithmetic. That's mathematics and it's not ideology. So sooner or later, one of those things is going to have to happen."

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