Treasury View - History

History

In the late 1920s and early 1930s, during the height of the Great Depression, many economists (most prominently John Maynard Keynes) tried to persuade governments that increased government spending would mitigate the situation and reduce unemployment. In the United Kingdom, the staff of the Chancellor of the Exchequer, notably Ralph George Hawtrey and Frederick Leith-Ross, argued against increased spending by putting forward the "Treasury view". Simply put, the Treasury view was the view that fiscal policy could only move resources from one use to another, and would not affect the total flow of economic activity. Therefore, neither government spending nor tax cuts could boost employment and economic activity. This view can historically be traced back to various statements of Say's law.

Keynes argued against this position, and particularly in The General Theory of Employment, Interest, and Money, provided a theoretical foundation for how fiscal stimulus can increase economic activity during recessions.

Opinions are currently sharply divided on the Treasury view, with different schools of economic thought holding contradicting views. Many in the "freshwater" Chicago school of economics advocate a form of the Treasury view, whereas economists from saltwater schools reject the view as incorrect.

A number of prominent financial economists (including Eugene Fama) have recently advocated the strong form of this view – that of no possible impact. However, it is categorically rejected by Keynesian macroeconomics, which holds that economic activity depends on aggregate spending (at least in the short run). It is related to, and at times equated with, theories of Say's law, Ricardian equivalence, and the Policy Ineffectiveness Proposition.

Noted macroeconomists such as Milton Friedman and Robert Barro have advocated a weak form of this view, that fiscal policy has temporary and limited effects. Such a view is not incompatible with Keynesian macroeconomics.