Transcript HOW THE FEDERAL GOVERNMENT SPENDS OUR MONEY

Explorations in Economics
Alan B. Krueger & David A. Anderson
Chapter 15: Fiscal Policy
- Module 44: Government Revenue and Spending
- Module 45: Deficits and the National Debt
- Module 46: Managing the Business Cycle
MODULE 44:
GOVERNMENT REVENUE AND SPENDING
KEY IDEA:
The government uses tax collections to fund its operations and
programs.
About two thirds of federal government spending is mandated
by law.
OBJECTIVES:
• To identify the sources of federal government revenue.
• To specify how the federal government spends its revenue.
• To explain the difference between mandatory and
discretionary spending.
SOURCES OF
GOVERNMENT REVENUE
All levels of government raise revenue
through taxation.
•
•
•
•
•
•
Individual income taxes
payroll taxes
corporate income taxes
estate taxes
gift taxes
import taxes
This is a review
from Chapter 10
SOURCES OF
GOVERNMENT REVENUE
Selling Government Securities
A Treasury bill (T- bill) is a security issued by the U.S. Treasury
that matures in 4, 13, 26, or 52 weeks.
A Treasury note (T- note) is a U.S. Treasury security that pays
interest in the form of coupon payments and matures in 2, 3, 5,
or 10 years.
A Treasury bond (T- bond) is a U.S. Treasury security that pays
interest in the form of coupon payments and matures in 30
years.
THE FEDERAL BUDGET
The federal budget is a plan for how
the federal government will spend
money over the coming fiscal year.
The fiscal year for the federal
government is the period over which
the federal budget applies. It begins
on October 1 and ends on
September 30.
THE FEDERAL BUDGET
SPENDING
Federal Government Spending, 2012
HOW THE FEDERAL GOVERNMENT
SPENDS OUR MONEY
Mandatory spending is spending that is required by existing
law.
Entitlement programs are programs that people are entitled to
by law if they meet certain qualifications.
HOW THE FEDERAL GOVERNMENT
SPENDS OUR MONEY
Transfer payments are payments for which the
government receives no goods or services in return.
HOW THE FEDERAL GOVERNMENT
SPENDS OUR MONEY
These are the specific entitlement
programs at the federal level.
• Which are age eligible?
• Which are means tested?
• Which require contribution from the
entitled?
•Which allow the states to set the
eligibility requirements?
Age eligible?
Social Security, Medicare
Means-tested?
Medicaid,
Supplemental Nutrition Assistance
Program
Require contribution?
Social Security,
Disability Insurance, Medicare,
Unemployment Insurance
States set eligibility?
Temporary Assistance for Needy
Families, Unemployment Insurance
HOW THE FEDERAL GOVERNMENT
SPENDS OUR MONEY
Discretionary spending is
government spending that is not
required by law; rather, it is
authorized annually by Congress
and the president.
MODULE 44 REVIEW
What is…
A. Treasury bill
B. Treasury note
C. Treasury bond
D. Face value
E. Coupon payments
F. Government security
G. Fiscal year
H. Federal budget
I. Mandatory spending
J. Entitlement programs
K. Means- tested
L. Transfer payments
M. Appropriation bills
N. Discretionary spending
MODULE 45 :
DEFICITS AND THE NATIONAL DEBT
KEY IDEA:
When the federal government spends more than it receives in
revenues, it runs a deficit for the year and adds to the national
debt. Deficit spending is spending in excess of revenues. The
National Debt is over $16T.
OBJECTIVES:
• To identify the difference between an annual deficit and the
national debt.
• To explain how deficits and debt are related.
• To analyze the effects of the national debt on individuals and
firms.
DEBT, DEFICITS, AND
SURPLUSES
A budget deficit or budget surplus is the difference between
the amount of government payments and the amount of
government revenues in a particular year.
DEBT, DEFICITS, AND
SURPLUSES
The national debt is the amount of money that the federal
government has borrowed over time to fund annual budget
deficits and has not yet repaid.
DEBT, DEFICITS, AND
SURPLUSES
The national debt consists of two categories:
•
The public debt is the money owed to investors (individuals,
banks, pension funds, fund managers, insurance companies, both
domestic and foreign) by the federal government.
•
The intragovernmental debt is the money the federal
government owes to government programs such as Social
Security and Medicare.
DEBT, DEFICITS, AND
SURPLUSES
A balanced budget is a budget designed to equate
expected revenues with planned expenditures.
Reasons for Annual Deficits
• Most are planned to achieve worthwhile payoffs.
• As economic performance falters, social services
increase and government tries to jump-start the
economy with spending and assistance.
DEBT, DEFICITS, AND
SURPLUSES
Borrowing to Fund Deficits
Treasury Inflation-Protected Securities (TIPS) are U.S. Treasury
securities that protect investors against inflation because the
amount to be repaid rises with inflation.
The Federal Reserve (the Fed), the central bank of the United
States, buys US government securities. When the Federal
Reserve uses money that was not in circulation to purchase
securities, the practice is called monetizing the debt.
DEBT, DEFICITS, AND
SURPLUSES
The debt limit is the highest amount that the national debt can
reach, as authorized by Congress.
The debt to GDP
ratio is important in
evaluating a nation’ s
ability to repay the
debt.
THE EFFECTS OF THE
NATIONAL DEBT
Higher Interest Rates
Dividends are payments made out of a corporation’s profits to
owners of its stocks. The federal government makes interest
payments to US debt owners.
As investors buy the government debt, they have less funds for
private investment.
The crowding- out effect is the constraint on private sector
borrowing that results from higher interest rates due to
government borrowing.
THE EFFECTS OF THE
NATIONAL DEBT
The Burden on Future Generations
The payment of interest on the national debt is called servicing the debt. As
the size of the debt grows, the amount of the interest payments must be
increased.
The Risk of Foreign Investment
As foreigners buy our debt, the interest payments end up outside the US
economy. Without this foreign buying of our debt, we would have less to
spend and boost the US economy.
Some Good News about the National Debt
Taxation, printing money, and the ability to pay the interest on the debt is
relatively positive news.
MODULE 45 REVIEW
What is…
A. Deficit spending
B. Budget deficit
C. Budget surplus
D. National debt
E. Balanced budget
F. Treasury InflationProtected Securities
G. Federal Reserve
H. Monetizing the debt
I. Debt limit
J. Public debt
K. Intragovernmental debt
L. Dividends
M. Crowding- out effect
N. Servicing the debt
MODULE 46:
MANAGING THE BUSINESS CYCLE
KEY IDEA:
The federal government has several tools that sometimes help
smooth out contractions and expansions in the economy.
OBJECTIVES:
• To explain the difference between contractionary and
expansionary fiscal policies.
• To analyze the problems associated with economic
forecasting.
• To convey the difference between discretionary fiscal policies
and automatic stabilizers.
LOOKING FOR
MACROECONOMIC EQUILIBRIM
Macroeconomic
equilibrium occurs when
aggregate supply equals
aggregate demand.
Fiscal policy is the use of
government spending and
taxation to pursue
economic growth, full
employment, and price
stability.
LOOKING FOR
MACROECONOMIC EQUILIBRIM
Disposable income is
income after taxes
have been removed.
This is the money now
available for either
spending or saving.
Changes to tax rates and the
effect of transfer payments can
affect aggregate demand.
LOOKING FOR
MACROECONOMIC EQUILIBRIM
Expansionary fiscal
policy is any
combination of
government spending
and tax cuts meant to
spur the economy.
The rightward shift of
the AD results in a
higher price level but
higher RGDP.
Expansionary Fiscal Policy
• To expand the economy we need to increase
disposable income (lower taxes) and/or to increase
government spending (deficit spending).
• This is fiscal policy to correct a recessionary phase of
the business cycle.
• We need to “pump” up the economy with stimulus
spending and/or lower taxes.
LOOKING FOR
MACROECONOMIC EQUILIBRIM
Contractionary fiscal
policy is any combination
of government spending
cuts and tax increases
meant to slow the
economy down.
The leftward shift of the
AD results in a lower
price level but lower
RGDP.
• Contractionary Fiscal Policy
To contract the economy we need to
reduce disposable income (increase taxes)
and/or decrease government spending.
This is fiscal policy to correct an
inflationary economy.
The price level is too high and robbing
consumer of spending power.
We need to “slow down” the economy
(aggregate demand) with lower
government spending and/or higher taxes.
DISCRETIONARY
FISCAL POLICIES
Discretional fiscal policy is any Congressional action to
increase or decrease taxes and/or change the level of
government spending.
Discuss how these fiscal policy measures would work:
•
•
•
•
Change in tax rates on individuals or corporations
Extending unemployment benefits beyond 26 weeks
Change in tax deductions
Changes in business taxes and deductions
AUTOMATIC STABILIZERS
Automatic stabilizers are changes in taxation and transfer
payments that moderate changes in GDP and do not require
authorization from the government.
• Tax Revenues rise in expansionary periods and fall in
recessionary periods
• Transfer Payments rise in recessionary period and fall in
expansionary periods
Automatic stabilizers ocurrs without any vote or discretion necessary by Congress.
• Why do tax revenues rise in expansionary periods? Why do they fall in
recessionary periods?
• Why do transfer payments increase in recessionary periods? Why do they fall in
expansionary periods?
AUTOMATIC STABILIZERS
Demand-side policy is policy meant to stabilize or
stimulate the economy by changing aggregate demand.
Supply-side policy is policy meant to stimulate the
economy by increasing aggregate supply.
Why not choose? Incentives for hard work and eliminate
regulations where cost is greater than benefit.
THE LIMITS OF FISCAL POLICY
Mandatory Spending
• Controversial to change the very popular entitlement
programs like Social Security and Medicare. Congress must
change the law.
Discretionary Spending
• Strong lobbying efforts for specific spending like national
defense, medical research, environmental protection and
others.
THE LIMITS OF FISCAL POLICY
An inside lag is a delay between the onset of a problem and the
implementation of a solution.
A recognition lag is the time it takes economists and government
officials to realize that the economy is experiencing a problem.
An outside lag is the time between a policy action and the
resulting effect on the economy.
Unintended Consequences means poorly timed efforts can push
the economy in the opposite direction of what is intended.
MODULE 46 REVIEW
What is…
A. Fiscal policy
B. Macroeconomic
equilibrium
C. Disposable income
D. Expansionary fiscal policy
E. Contractionary fiscal
policy
F. Discretionary fiscal
policy
G. Automatic stabilizers
H. Demand- side policy
I. Supply- side policy
J. Inside lag
K. Recognition lag
L. Implementation lag
M. Classical economics
N. Keynesian economics
O. Outside lag