Chapter 14 Fiscal Policy

I. Economic Goals of the United States
II. Discretionary Fiscal Policy
III. Automatic stabilizers
IV Monetary affects of Fiscal Policy
I. Economic Goals of the United States

 A. Employment Act of 1946 begins reaction to
     five-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
B. HumphreyHawkins 1978 Full Employment Act
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 Policy Options 
     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  

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
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 equipment 
        2. Increase government spending (G)
        3. The result will be 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 

In Europe Austerity Was
Either Neutral or Destructive

 How Austerity Has Failed



Government Spending Increases GDP

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
2. Concise Video
3. Expanded Video 9.32 minutes

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 - 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. 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.

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. 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 FED 7/16


Debt Ceiling Deal 8/6/11 The Economist

      F. Raising Taxes In 2012 Not Same As 1993
       from businessinsider, 8/6/12
  G. Affect of Tax increases in 1937

 IV. 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
         C. Can Fiscal Policy Stableize Output

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



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