Transcript Fiscal Policy - Cloudfront.net

Public Policy #3
Fiscal Policy
The Budget
• You must trim the budget by
looking at 10 key areas of
spending!
Fiscal Policy: taxing, spending
and borrowing
• Regulated by Congress (primarily) &
President
• It all starts with a budget: proposed
spending plan for a fiscal year
Revenue Sources
•Tariffs
•Excise taxes: aka “sin” tax, tax on
alcohol, cigarettes
• Income taxes: from 16th amendment
• Corporation taxes
• Social Security / Medicare payroll tax
• Borrowing
Types of taxes
•Progressive (or
Graduated): taxes
that go up in % as
your income increases
–Income tax: 1035% of income
depending on how
much you make
Regressive Taxes
• Taxes that take out a
larger % of income as
income decreases
–Sales tax: a 10% sales
tax has a much greater
impact (larger % of
income) on low income
than high income
Who pays the most in taxes?
Expenditures
•Mandatory Spending:
–Entitlements: gov is required to
pay if ppl meet requirements
• EX: Social Security, Medicare
–2/3 of budget
Other Expenditures
• Discretionary Spending:
Congress can decide how to spend sort of 
–Military, education, enviro,
transportation, etc
–1/3 of budget
• Interest on debt: as debt grows,
minimum payment grows
How has mand/discr spending
changed since 1965?
How does this change in
spending affect Congress’
ability to change policy?
Budget Process
1.
2.
3.
4.
5.
OMB / Pres create a plan
Submit to Congress around January
CBO provides input
Appropriations Cmte (HR) reviews
Both houses approve w/ a
concurrent resolution
6. Pres signs (or vetoes)
7. Goes into effect on Oct 1st
How to spend our money….
•Keynesian Economics: govt can
stimulate economy by spending
more when times are bad
–Deficit spending: spending more
money than one has in revenue
–Used by FDR during depression
–Gov builds a dam, pays workers for
their labor, workers have more $ pay taxes & spend more
Remember….
•Deficit: amount over spent in one
period
–Over 1 trillion this fiscal year
•Debt: total amount owed
–14 trillion & growing
• Should we increase spending
when the economy is hurting?
Another view:
• Supply Side Economics “Trickle Down Theory”: Govt cuts
taxes on individuals & businesses
–Ppl w/more money – spend more
–If a business has more money, they
pay employees more, hire more ppl,
etc
–Used by Reagan & Bush
What should we do to fix
our economy today?
Which is better – Keynesian
or Supply Side Economics?
Balanced Budget Act
• Required a balanced budget (spend
only as much as they have in
revenue) by late 1990s
• It worked! Congress & Pres balanced
budget and even had a surplus
(more revenue than spending) by 992000
• It all changes on 9/11
Policy #4: Monetary Policy
1. Fiscal policy is
A. taxing B. spending C. borrowing
D. All of the above
2. An increase in taxes on cigarettes is what
kind of tax? A. progressive B. excise
C. corporate D. Payroll
3. Which of the following is a payroll tax?
A. Social Security B. Medicare
C. Unemployment D. All of the above
Monetary Policy: regulates
amount of money in circulation
Regulated by the
Federal Reserve
Board
–Bd of 7 members,
appt’ed by Pres,
confirmed by S,
serve fixed terms
(independent
regulatory agency)
Imagine you each have $5….
Will you be willing to spend $5
for one soda?
Now, each of you have $20
Will you be willing to spend $5
for one soda?
You were (probably) more likely
to say yes when you had $20.
When you only had $5 your
money was more valuable to you
and were less likely to spend it.
But, as you get more money,
you’re more likely to spend and
thus increase the prices of
goods. This is inflation!
How does the Fed work?
• Controls supply (amount) of money
–Too much money = inflation
• Inflation – increase in prices (like
when your parents say I
remember when it cost $3 to go
to the movies – you need how
much to go to the movie!!!?)
• Some is good & normal
• Too much – prices rise faster than
wages = scary!
BUT,
• Too little money = hurts economy,
deflation
–People aren’t spending - thus
employees aren’t hiring- thus
people don’t have jobs – thus can’t
spend & can create a vicious cycle
How does the FED do it?
1. Regulate interest rates
• Low interest rates = cheap money /
loans – many ppl borrow
• High interest rates – stops ppl from
borrowing money, curbs inflation
• 200,000 @ 6.5% for 30 yrs =
$1550/mo
• 200,000 @ 4.5% for 30 yrs =
$1300/mo
Reserve Requirement
2. Reserve Requirement: amount
banks are required to keep on hand
in bank
• High reserve – less money to
give out in loans (curbs spending)
• Low reserve – more money to
give out in loans (encourages
spending)
Question time 
• Interest rates are currently very low,
what does this tell us about the
nature of the economy?
• In the early 1990s interest rates for
mortgages were about 15%, what does
this tell you about the economy then?