Chapter 14 Fiscal Policy
I. Economic Goals of the United States
Economic growth, Price stability, Low unemployment,
Positive balance of payments
I. Economic Goals of the United States Employment Act of 1946
began 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. Humphrey–Hawkins 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
Discretionary Fiscal Policy
A. Discretionary fiscal policy is the deliberate manipulation
of government taxing and spending to control AD and the
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
Government Spending Increases GDP
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
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
Effectiveness of Fiscal Policy
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
Editor's Note: Fiscal Policy and the
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
F. Raising Taxes In 2012 Not Same As 1993 from businessinsider
G. Affect of Tax increases in 1937
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
Modern Monetary Theory Videos
Demystifying Modern Monetary
What Modern Monetary Theory Tells Us About Economic 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, 4/16
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