Chapter 14 Fiscal Policy

I. Economic Goals of the United States
II. Discretionary Fiscal Policy
III. Automatic stabilizers
VI. Monetary affects of Fiscal Policy
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I. Economic Goals of the United States
 Employment Act of 1946 begins reaction to 5-year Soviet Union economic plans.
        1. Set four economic goals
            a. Economic growth
            b. Price stability
            c. Low unemployment
            d. Positive balance of payments
        2. Created the President's
Council of Economic Advisors
 3. Some History from St. Louis FED
HumphreyHawkins Full Employment Act of 1978
        1. Set five-year goals for economy
        2. Specific goals 
             a. 4% unemployment
             b. 3% inflation by 1985, 0% by 1988
             c. Reduce balance of payments deficit
             d. Increase economic growth and investment
             e. Reduce the size of the public sector
    C. Government methods of affecting the economy to achieve economic goals
         1. Fiscal policy, the focal point of Keynesian economics, is this chapter's topic..
         2. Monetary Policy will be covered in chapter 15.
D. Appropriate
Fiscal Policy leads to noninflationary Full Employment
         1. Discretionary fiscal policy
         2. Automatic stabilizers


Other Macro Chapters

8) Measuring Total Economic Activity 
9) The Business Cycle

10) Macro Equilibrium 
11) Competing Macro Theories and Issues
10) Macro Equilibrium 
11) Competing Macro Theories and Issues
12 Keynesian Economics: An Expanded View
13 Money, Banking, and the Creation of Money

See Financial Crisis and The Great Recession
14) Fiscal Policy
15) Monetary Policy  
16) Stagflation % Rise of Supply-Side Economics
17) Budget Deficits
See Democratic Capitalism vs Capitalistic Democracy 
18) Economic Growth 

II. Discretionary Fiscal Policy
     A. Discretionary fiscal policy is the deliberate manipulation of government
          taxing and spending to control AD and the business cycle.
     B. AD = C + I + G + XN
     C. Expansionary fiscal policy consists of reversing an economic downturn
          by increasing AD with deficit spending.
          1. Lower taxes to increase Consumption (C) and Investment (I)
              a. Personal income taxes  
              b. Capital gains taxes paid on the profit from the sale of commercial
                   real estate, a company, and financial assets (stocks and bonds)
              c. Investment tax credit which is a direct lowering of the tax liability
                  of companies investing in certain approved types of plant and
           2. Increase government spending (G)
           3. The result will be a fiscal stimulus through deficit spending. 
           4. The impact of a fiscal stimulus, once implemented, will affect AD. 
           5. Fiscal policy and the multiplier... is an 9 minute video from YouTube
     D. Concretionary fiscal policy: Decreasing inflationary pressure by
          decreasing AD
          1. Increase taxes
          2. Decrease government spending
          3. The result will be a fiscal drag with smaller deficits or a surplus. 
     E. The multiplier effect described in chapter 12 applies to fiscal
          policy measures.
     F. Loanable Funds and Crowding Out of Private Investment
         1. Government borrowing fiscal policy to expand economy raises
             demand for loanable funds increasing interest rates which crowds
              out/lowers private investment which slows the economy
Concise Video
         3. Expanded Video 9.32 minutes

Government Spending Increases GDP

Editors Note: The long-term affects of high debt and inflation from borrowing will not be known for a years.

In Europe Austerity Was
Either Neutral or Destructive

How Austerity-has Faile

  III. Automatic stabilizers
       A. Cause the economy to expand without government action during recession by increasing AD.
       B. Cause the economy to contract without government action during inflation by lowering AD.
       C. fiscal policy & automatic stabilizers - You Tube 8 min.
       D. Examples
           1. Transfer payments (unemployment compensation, food stamps, and other social programs) 
               increase during recession to increase AD.
           2. Progressive taxes (income tax) increase during inflation to lower AD.
The Importance of Automatic Stabilizers to the Economy - CBS

    IV. Fiscal policy effectiveness is questionable 
          A. Timing
             1. Determining when recessions begin is difficult. 
                 a. Disagreement over whether the U.S. was in a recession from 1989-1991 resulted in little 
                     fiscal action being taken.
                 b. The 2001 slowdown happened so fast there was not time for preemptive action.
             2. Fiscal policy takes time to implement     
             3. There will be a delay because it takes business time to expand capital investment.                 
         B.  Political considerations

             1. Some spending programs are difficult to cut (social security).
             2. Expansionary bias: people vote to spend but not to tax.
             3. Political business cycle: it is difficult to accomplish anything economically constructive 
                 during an election year

        C. Until recently, many felt the federal debt is too big and has rendered fiscal policy ineffective. 
             Its success in ending the 2001 recession has yet to be determined although the Federal 
             budget surplus certainly makes it easier to increase federal spending and decrease taxes
             although the expense of fighting three wars has again increased the deficit.

 D. In 2012 People Fear the Drag of Taking Away the Stimulus of 2009- 2011.

       E. Fiscal Policy and the Great Recession

In the initial months of the stimulus, the net government contribution to GDP growth was positive. As the severe recession impacted government budgets, however, state and local cuts mounted, ultimately offsetting stimulus at the national level. State and local cuts have very nearly run their course at this point, but the economy now faces the run-off of stimulus programmers, as well as the expiration of emergency unemployment benefits and, potentially, the expiration of lots of other tax proposals. The President's latest plan aims to move the total government impact on growth from a drag of about 1.5 percentage points of GDP to approximately even. When the economy is growing at between 1% and 2% per year, a 1.5 percentage point drag on output is a very big deal indeed.


          The Debt Ceiling Deal from the 8/6/11 issue of The Economist

      F. Why Raising Taxes In 2012 Is Not The Same As Raising Taxes In 1993
           businessinsider, 8/6/12
      G. Affect of Tax increases in 1937 Naked Capitalism

 V. Affects of Fiscal Policy
A. Until recently, government borrowing increased the demand for loanable funds causing higher
            long-term interest rates. 
           1. Crowding out is the term used to describe how high rates due to government borrowing 
               lower private investment.
           2. Many feel high economic growth of the late 1990's resulted because of low interest rates
               caused by federal fiscal responsibility.   
      B. In the early 1990 people were people are concerned about the fiscal drag caused by a
           federal surplus
Can Fiscal Policy Stableize Output

Austerity Chart That's Worth 1000 Words  10/5/13



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