Transcript Fiscal Policy, Deficits, and Debt

13
Fiscal Policy, Deficits, and Debt
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Fiscal Policy
• Council of Economic Advisors (CEA)
• Deliberate changes in
• Government spending
• Taxes
• Designed to
• Achieve full-employment
• Control inflation
• Encourage economic growth
LO1
Fiscal Policy
• Define:
• Budget deficit
• Budget surplus
• National, or public, debt
LO1
Expansionary Fiscal Policy
• Increases AE, GDP, and employment
• Increase government spending
• Decrease taxes
• Combination of both
• Expansionary policy creates a deficit
(G > Tax revenue)
LO1
Equilibrium vs Full Employment
• Recessionary Expenditures Gap
• Amount that AE must increase to
reach full-employment, eq. GDP
• Spending is too low at fullemployment
• Use expansionary fiscal policy to
increase AE
• Desirable to create a deficit
LO1
Contractionary Fiscal Policy
• Decreases AE, GDP, and
•
LO1
employment
• Decrease government spending
• Increase taxes
• Combination of both
Contractionary policy creates a
budget surplus (G < Tax revenue)
Equilibrium vs Full Employment
• Inflationary Expenditures Gap
• Amount that AE must decrease to
reach full-employment, eq. GDP
• Spending is too high at fullemployment
• Use contractionary fiscal policy to
decrease AE
• Desirable to create a surplus
LO1
Policy Options: G or T?
• Expand the size of government
• Increase government spending
• Increase taxes
• Reduce the size of government
• Decrease taxes
• Decrease government spending
LO1
Built-In Stability
• Automatic stabilizers
• Tax revenues vary directly with
•
LO2
GDP
• Transfers vary inversely with GDP
• Automatically creating a surplus
during inflation and a deficit during
recession
Reduces severity of business
fluctuations
Evaluating Fiscal Policy
• Use the cyclically adjusted budget to
evaluate fiscal policy
• Removes impact of built-in stabilizers
• Size of deficit/surplus if the economy is
at full-employment for the year
• Cyclically adjusted budget only
changes when government changes
fiscal policy
LO3
Recent U.S. Fiscal Policy
LO3
Fiscal Policy: The Great Recession
• Financial market problems began in
•
LO4
2007
In 08 passed $152 billion stimulus
consisting of tax breaks
• Most people saved or paid credit
cards
• Not very expansionary
Fiscal Policy: The Great Recession
• In 09 passed American Recovery &
Reinvestment Act with $787 billion
stimulus
• Decreased taxes for low/middle income
• No lump sum checks
• Increased spending on transportation,
ed, and aid to state governments
LO4
Budget Deficits and Projections
LO4
Problems, Criticisms, & Complications
• Problems of Timing
• Recognition lag
• Administrative lag
• Operational lag
• Political considerations
•
•
•
LO4
– political business cycle
Future policy reversals
Off-setting state and local finance
Crowding-out effect
Problems, Criticisms, & Complications
• Biggest criticism of fiscal policy is
Crowding-Out Effect.
• Crowding-Out Effect – When
government borrows money, demand for
money increases, and interest rates rise,
reducing (crowding-out) investment.
– Offsets expansionary impacts of fiscal
policy.
LO4
The U.S. Public Debt
• $16.4 trillion in 2012
• The accumulation of years of
•
•
•
LO4
federal deficits and surpluses
Owed to the holders of U.S. securities
Caused by war, recession, and fiscal
policy
Video Debt
The U.S. Public Debt
• GDP is income of a nation
• Larger income means a greater ability
•
LO4
to carry a large debt
Look at debt as percentage of GDP
as better gauge
The U.S. Public Debt
• Interest charges on debt
• Largest burden of the debt
• Must at least pay interest every
year
• 2.3% of GDP in 2012
• When interest as a percent of GDP
increases, must raise taxes
LO4
The U.S. Public Debt
• False Concerns
• Bankruptcy
• Refinancing
• Taxation
• Burdening future generations
LO4
The U.S. Public Debt
LO4
The U.S. Public Debt
• 33% of debt is externally held debt –
•
•
LO4
paying it back will decrease RGDP
67% of debt is internally held debt –
paying it back will not reduce RGDP
Debt is an asset as owners of debt
and a liability as taxpayers
The U.S. Public Debt
LO4
Global Perspective
LO4
Substantive Issues
• Income distribution
• Incentives
• Foreign-owned public debt
• Crowding-out effect revisited
• Future generations
• Public investment
LO4