Moreover, the resurfacing of the fiscal/monetary policy mix framework draws the macroeconomics policy debate back into short-run stabilization considerations at the expense of long run objectives. Such digressions have a track record of being destabilizing.
Monetary policy and fiscal policy have very different economic effects, and these differences most be reflected in their objectives. Fiscal policy determines the allocation of national resources between the public and private sectors and influences long-run economic output by altering incentives to consume, save, and invest. A change in fiscal policy is not capable of generating a permanent shift in aggregate demand. And the magnitude and timing of the impacts of fiscal policy are highly unpredictable, so that fiscal policy is ill suited as short-run stabilization tools. Moreover, standard measures of fiscal thrust based on changes in the size of deficits or surpluses are misleading and unreliable. Depending on how taxes or spending are changed, similar sized changed in the budget may have different effects in supply and demand. This suggests that except in extreme situations, fiscal policy must pursue reasonable and efficient tax and spending structures consistent with maximum growth and stabilize short-run economic fluctuations. .
In contrast, monetary policy is not capable of permanently changing productivity or output, but has an aggregate demand tool, it creates inflation by generating excess demand relative to productive capacity, which may distort economic behavior and disrupt expansion. While monetary policy affects aggregate demand and short-run economic activity with lags that vary, its lags are significantly more predictable then those of fiscal policy. Presently, with countless spending and tax plans under consideration, the Federal Reserve must pursue price and stability independent of fiscal policy. This requires providing sufficient money supply such that the growth in aggregate demand is in line with aggregate supply.