Transcript Document

Chapter 13. Fiscal Policy
Plus page 538 - Supply Side Economics and the Laffer Curve.
Link to syllabus
Government Spending and Taxes/GDP. Fig 13-1 p. 378
Breakdown of US Government Taxes and
Spending, 2007. Figs. 13-2 and 13-3, p. 379
(Seems to be total gov’t)
Michigan Taxes
Michigan Taxes & Spending
Figure 13-6. p. 384 The 2009 Recovery Act. (billion $)
Financial bailouts are not included here.
Hypothetical Effect of Fiscal Policy. Tab. 13-1 p. 386
MPC is 0.5. Minor detail: the right hand column is less than the middle
column, because people don’t spend the total amount of the transfer.
Nevertheless, the multiplier is always positive.
The US Federal Budget Deficit and the Business Cycle.
Figure 13-7, p. 391
The (absolute and relative) size of the deficit increases during recessions,
and falls during expansions. This is only partially due to countercyclical
spending.
The Actual Budget Deficit versus the Cyclically
Adjusted Budget Deficit. Fig. 13-9, 392
Recall: Fig. 10-5 p. 286.
An Increase in the Demand for Loanable Funds.
Gov’t
Spending
Interest
Rates
Business
Investment
Standard example; increased government deficit,
financed internally
“Crowding out”
reduces or
eliminates
Positive AD effect
of gov’t spending
U.S. Federal Deficits and Debt/GDP. Fig. 13-11 p. 398
x
US Debt/GDP
source: Statistical Abstract of US
Data on US Government Debt
2002
Total $(trillion)
Privately held
Held by Foreigners
Foreign/Total (%)
Foreign/Private
2011
6.4
14.8
3.0
1.2
8.4
4.7
19
41
32
55
Source: Calculations based on data from US Treasury
Japanese Deficits and Debt/GDP. Fig. 13-12 p. 371
Global Comparison p. 396. Debt Levels
Other countries like Norway: UAE, Saudi Arabia, Kuwait
Future Demands on the Federal Deficit. Fig. 13-12, p. 400
mt believes it is irresponsible to include 80 year projections,
because so much can and will change.
U.S. Gov't. Surplus or Deficit(−)/GDP
US deficits, 1930-2010
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
-6.0
x
-7.0
x
1930 1940 1950 1960 1970 1980 1990 2000 2010
Surplus or Deficit(−)
Review of Deficit/Debt, by Presidents
For a long time, balanced budget was the goal. This was
changed by Roosevelt, and re-enforced by Kennedy/Johnson
The deficit grew dramatically under Reagan. This was caused by
his tax cuts, increased defense spending, and the contractionary
policies of the Federal Reserve Bank.
A major contributor to the non-re-election of George H Bush
was his promise of “No new taxes,” which he broke.
Under Clinton, the deficit was turned into a surplus. Perhaps thi
was due to good policies. Republicans would claim that it was
due to their not letting him spend in areas like Health Care.
Deficit under George W. Bush
When W. was elected, all projections were for surpluses
“as far as the eye can see.”
As a candidate, W. promised tax cuts, and implemented one
quickly after entering office, mailing tax refunds to citizens.
The crisis of 2008 dramatically worsened the deficit.
The majority of economists would probably agree that the
overall impact of W.’s tax cuts was regressive, i.e. lowering
taxes more for the very wealthy.
The Obama administration is currently in debates with
Republicans about extending or reversing those taxes.
Why did the Clinton’s government surplus
turn into deficit under President Bush?
Analysis according to Henry Aaron (Brookings Inst.)
1. Economic slowdown (39%)
9-11
Bubble economy—Enron, World.com,
Increasing competition from overseas producers
2. Tax cuts (27%)
3. Greater spending on Iraq, Homeland security (19%)
4. Others (15%)
Source: http://www.brookings.edu/dybdocroot/views/testimony/aaron/20040204.pdf
The Deficit under Obama
Near the end of the President Bush’s term, it became clear that
massive steps were needed to avoid a financial meltdown, and the
Bush/Paulson requests for these were approved by Congress.
These actions involved expansionary spending and transfers, and
bailing out banks and auto companies. These programs were
continued under President Obama, with Fed Chief Bernanke and
Treasury Secretary Geithner providing continuity.
It is inevitably the case that some of those actions were not taken
with sufficient care and forethought. It is also the case that Obama
did not get as much as he wanted from Congress.
Current Issues
It is very difficult to predict what will happen to the deficit:
a. Tax revenues decline in a recession – are we in a ‘double dip’ recession?
b. Some of the massive increase of the deficit was caused by the massive
bailouts. This was ‘one-time-only’ spending, so the deficit will be
reduced if there are no new bailouts.
c. The actual dollar amounts of those recent major bail-outs will not be
known for a while, until all the accounting is in, and we know what
value the government receives for re-selling the companies.
d. The 2010 election saw the rise to power of anti-deficit [tea-party]
hawks, who want to stop the bail-outs and other expansionary (but
deficit-creating) programs, and lower some taxes.
e. With Obama’s re-election, his policies won’t change. Mitt Romney
offered the prospect of a replay of the experience with Reagan’s
“supply side” policy of aggressive tax cuts.
White House and CBO’s Deficit Projections, 2009
Source: Washington Post March 21, 2009
Gramm Rudman Hollings Act, 1985 (and revisions)
Set up a multi-year schedule of targets for reduction of gov’t deficits.
If the deficit didn’t meet the targets, there would be automatic cuts ‘sequesters’ - and these automatic cuts would not touch defense nor
Social Security.
Was declared unconstitutional by the Supreme Court, as it gave
somebody (the computer programmer for the Congressional Budget
Office) power over both the Legislative and the Executive branches.
Also, Congress ignored rules during wars and emergencies.
Importance: Seemed to be the last chance at achieving this by
legislation, short of a constitutional amendment.
Rudman to Congress: I’m filing for divorce on the grounds of
infidelity and irreconcilable differences.
Unless the fractious U.S. Congress can strike a deal, about $600 billion
in U.S. spending cuts and higher taxes are due to kick in on January 1,
threatening to push the U.S. economy back into recession and hurt
world growth.
Not only are tax cuts enacted under President George W. Bush set to
expire, but automatic spending cuts designed to exert pressure on
lawmakers to strike a long-term budget deal will also take effect. The
U.S. Congress will also soon face the need to raise the nation's debt
limit to avoid a default.
The reason the fiscal cliff is such a threat to 2013′s economy isn’t that
it’s too little deficit reduction — it’s that it’s too much all at once, 5.1
percent of GDP in a single year, which could throw the economy into
recession. Republicans agree on that. Democrats agree on that. And in
agreeing on that, both sides appear to be embracing an argument that’s
been rather contentious in recent years: that fiscal stimulus boosts shortterm economic growth and budget cuts hurt it.
Deficit/Debt Debates: Scattered parts of Chapter 17
False arguments:
We have to pay it back (think a large corporation)
Federal government deficits cause inflation or unemployment
Potentially valid arguments against:
Government deficits cause crowding out, lowering business investment.
We used to say we owe it to ourselves, but this is becoming less true.
Confusing aspects:
What measure of the debt to use – all, or just that owned by the public?
What about social security, which is a commitment, but not a debt?
What about ‘off-budget’ spending?
(Different Textbook). The Laffer Curve,
mentioned (without graph) on p. 538 of Krugman/Wells.
When the graph is not in our textbook, it’s not on the exam.
Laffer range
Traditional range
Were Reagan’s tax cuts a fair test of the Laffer Curve?
Early in his term President Reagan cut taxes, and the deficit grew.
Many economists – not just Keynesians – believe this disproves Laffer.
However:
1) Although Reagan cut taxes to consumers, Congress did not
approve cuts in business taxes [‘Trickle Down Economics”]
2) The Federal Reserve, under Paul Volcker, applied contractionary
monetary policy, which presumably overwhelmed the tax cuts,
because the economy went into a recession.
3) Reagan also increased defense spending.
Note that K/W are rather dismissive of the Laffer radical supply side story