Chapter 14 Fiscal Policy

I. Economic Goals of the United States    II. Discretionary Fiscal Policy    III. Automatic Stabilizers

IV. Effectiveness of Fiscal Policy      V. Fiscal Policy Affects the Private Economy     VI. Seven Innocent Frauds of Economic Policy

A more concise One-Page Test Review of Chapter 11 may help with exams. Updated 10/25/17    Please   

I. Economic Goals of the U. S. Employment Act of 1946
   began reaction to five-year Soviet Union economic plans.
A. Set four economic goals
       a. Economic growth
       b. Price stability
       c. Low unemployment
       d. Positive balance of payments
   B. Created Council of Economic Advisors conomic
HumphreyHawkins 1978 Full Employment Act
set specific goals

      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
   D. Government Policy Options to Meet Goals
        1. Fiscal policy, the focal point of Keynesian
            economics, is this chapter's topic.
            a. Discretionary fiscal policy
            b. Automatic stabilizers
        2. Monetary Policy will be covered in chapter 15.
        3. Appropriate Fiscal Policy leads to noninflationary
            Full Employment 
   E. Some History
        a. The Employment Act of 1946
        b. 70 Years of Advising the President by the CEA
Fiscal Foundations, History of Successful   for US pp181-224

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
          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 equipment 
         2. Increase government spending (G)
         3. The result is a fiscal stimulus through deficit spending. 
         4. The impact of a fiscal stimulus will affect AD. 
         5. Fiscal policy and the multiplier... is an 9 minute video
   D. Concretionary fiscal policy: Decreasing inflationary
          pressure by decreasing AD
          1. Increase taxes
          2. Decrease government spending
          3. A fiscal drag with smaller deficits or a surplus results.
   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
        2. Concise Video
        3. Expanded Video 9.32 minutes
   G. How L.B.J. Pushed Through Kennedy’s Tax Cut  BY BRUCE BARTLETT   

Source has much data



Are We Turning the Fiscal Policy Dials the Wrong Way?















In U.S. Government Spending
Increases GDP


In Europe Austerity Was
Either Neutral or Destructive

 How Austerity Has Failed



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

  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 - 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.
Importance of Automatic Stabilizers

Image result for automatic stabilizer graphs

   IV. Effectiveness of Fiscal Policy 
          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, military, education).
              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. 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. Kansas Fiscal Policy Tax Cut Failed 10/ 24/17 Barry Ritholtz
         F. Fed Uncertainty In Assessing The Economic Effects Of Tax Cuts.

See Chart 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. See Government Spending Might Not Create Jobs Even During Recessions



Federal Expenditures Lagged
After 2007 Great Recession Recovery

Great Recession Recovery Also Lagged

Full Employment:  Are We there Yet? 

Editor's Note: Fiscal Policy and the Great Recession
A world-wide saving glut developed in the late 1990's as the Asian Crisis caused developing nations to be more conservative and accumulate mostly dollar reserves. Their resulting lack of demand created  a positive trade balance and the need to create demand else ware to soak it up. The  US did it's part with two

unfinanced wars, a tax cut, and private debt expansion. 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.


Debt Ceiling Deal 8/6/11 The Economist

      F. Raising Taxes In 2012 Not Same As 1993 from businessinsider
G. Affect of Tax increases in 1937



 V. Fiscal Policy Affects the Private Economy
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.
       C. Can Fiscal Policy Stabilize Output

VI. Seven Deadly Innocent Sins Frauds of Economic Policy

     Source: Seven Deadly Innocent Frauds of Economic Policy - Warren Mosler pdf
     Lecture from W. Moster
62 min video
Video Interview

Modern Monetary Theory Videos
Demystifying Modern Monetary

What Modern Monetary Theory Tells Us About Econ Policy
Why the Elite are Living In an Economic Fantasy
Modern Money & Public Purpose
1: The Historical Evolution of Money and Debt
2: Governments Are Not Households
3: The Eurozone
4. Real vs. Nominal Economy

The Other Side of the Story

MMT vs. Austrian School Debate

Minsky, Inequality, and the Monetary:Fiscal Policy Outlook

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



Last .Chapter  Next Chapter 
Chapter 14 Class Discussion Questions Table of Contents
Chapter 14 Homework Questions Economics Internet Library


Other Macro Chapters
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
Financial Crisis, 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