Transcript Fiscal Policy - McEachern High School

Fiscal Policy
Revenues &
Expenditures
Essential Standards





The student will explain how the government uses
fiscal policy to promote price stability, full
employment and economic growth.
The student will define fiscal policy.
The student will explain the government’s taxing
and spending decisions.
The student will describe the difference between the
national debt and government deficits.
The student will explain how changes in fiscal policy
can impact an individual’s spending and savings
choices.
Fiscal Policy
Fiscal Policy is
determined by two
government
actions:
1. Collecting revenue.
2. Authorizing
expenditures.
► Both actions are
controlled by the…
► US Congress.
►
Which of the following is the best
example of a decision involving
revenue?
A.) the EPA passing new limitations on pollution.
B.) Congress' decision to raise marginal tax rates
to 36%.
C.) the President’s support for a new highwayconstruction bill.
D.) a new law that limits the importation of
Ecuadoran bananas.
Which of the following is the best
example of a decision involving
government expenditures?
A.) the institution of a "payroll tax holiday" that
temporarily cancels social security deductions.
B.) the institution of a permanent ban on all US
trade with Russia.
C.) the elimination of the so-called "death tax"
for families with a net worth of less than $1
million.
D.) the development of a high-speed rail line
between California and Texas.
Expansionary Fiscal Policy



1.
2.

Congress uses
expansionary policy to
raise the GDP…
Which can pull the
economy out of a
recession.
To do this, they have two
methods:
Increase expenditures.
Or cut taxes…
If the economy is in
HORRIBLE shape,
Congress might do BOTH.
Contractionary Fiscal Policy




1.
2.
Sometimes an
economy grows TOO
QUICKLY…
Which can cause
runaway INFLATION.
So Congress might
use contractionary
policy to COOL
THINGS OFF.
There are two
methods:
Cut expenditures…
Raise taxes.
In terms of fiscal policy, tax cuts
are thought to be...
A.) expansionary
B.) contractionary
In terms of fiscal policy, increases
in expenditures are thought to be...
A.) expansionary
B.) contractionary
Fiscal Policy: Classical Economics







Was the philosophy in the US
from 1776 through 1932—
It is based on the ideas of Adam
Smith…
When the economy is in trouble…
The government should DO
NOTHING…
Keep its HANDS OFF, and the
“invisible hand” would fix any
problems.
But the Great Depression (19291947) raised this question:
HOW LONG DOES IT TAKE FOR
THE INVISIBLE HAND TO GET
BUSY?
Demand Side (Keynesian) Economics
Was developed in the 1930’s
by British economist John
Maynard Keynes…
► Who argued that the
government was PART of
the economy…
► And in times of recession or
depression…
► The government should
INCREASE
EXPENDITURES…
►
►
Build bridges, highways,
hospitals, schools, airports,
dams, etc…
Which would CREATE
JOBS…
► And pull the economy OUT
OF TROUBLE.
►
Supply-Side Economics







Supply-siders believe that
taxes HURT the economy.
And in times of recession
or depression, TAX CUTS
are essential.
Tax cuts increase
demand…
Which increases business
profits…
Which causes businesses
to hire more workers…
And the government
collects MORE MONEY…
Even though tax rates are
LOWER.
In reaction to an economic downturn,
Congress announces a package of massive
tax cuts. Such a policy is in line with...
A.) classical economics.
B.) supply side economics.
C.) demand side economics
In reaction to an economic downturn, Congress
passes a stimulus package that includes billions of
dollars in funding for highway construction. Such
a policy is in line with...
A.) classical economics.
B.) supply side economics.
C.) demand side economics.
Do These Policies Work?










Keynesian (or Demand-Side) Economics calls for increased
SPENDING during recessions…
But where is that money supposed to come from?
Keynesian doctrine also calls for SAVING during expansions.
However, the government is never able to achieve the discipline
necessary to SAVE when the economy is strong…
So when the economy takes a downturn, the government is
forced to BORROW MONEY, which increases the NATIONAL
DEBT.
Supply-siders call for TAX CUTS when the economy is in
recession…
But if the government REDUCES its revenues, it must keep
spending under control…
However, out-of-control spending has become the US
government’s trademark…
Which forces the government to BORROW MONEY, which
increases the NATIONAL DEBT.
So although both theories look good on paper, they have actually
never worked in practice.
Surpluses & Deficits




Budget deficit—
expenditures
EXCEED revenues.
Budget surplus—
revenues EXCEED
expenditures…
The US has been
running a deficit for
the last several
years…
Leading to a huge
national debt.
The
National
Debt
►
►
►
►
►
►
Is the total amount of money the federal government
owes to bondholders.
Every year that the government runs a deficit, it must
borrow money to operate.
To borrow money, the government sells US Bonds
(they are sometimes called SECURITIES).
Individuals and nations all over the world buy them…
Because they are viewed as some of the safest in the
world…
The US is stable and has never defaulted on its debt.
The National Debt, as of 22 Mar, was….
Your personal share (if you are a US citizen) is…
$59,553.13
Since September 30, 2012, the National
Debt has increased by a DAILY average of…
$2.48 BILLION
Government Spending
 National Defense—20%.
 “Spending reductions would put our troops in harm’s









way.”
Social Security—20%.
“Social Security is the ‘third rail’ of American politics.”
Medicare & Medicaid—20%.
“We can’t balance the budget by refusing to care for the
sick”.
Safety Net Programs—20%.
“We’re going to balance the budget on the backs of the
‘most vulnerable’ members of society? NO.”
Interest on the national debt—10%.
Failure to pay interest would result in default, causing
an economic catastrophe.
And the rest is peanuts.
Why is the National Debt a Problem?
 If I give a loan to a person I think is a
HIGH RISK borrower…
 I will demand a high rate of interest to
compensate for that risk.
 Historically, the US government was
considered LOW RISK…
 And was only required to pay LOW RATES
of interest.
 However, our skyrocketing national debt
has started to make lenders NERVOUS…
 So they have started to require HIGHER
rates of interest.
 But high interest rates cause the debt to
increase MORE RAPIDLY…
 Which makes lenders MORE NERVOUS…
 And so on.
How Do We Fix The Problem?
 Debt can be paid down by






two methods:
Decreasing expenditures…
Or increasing taxes.
However, this action exactly
matches WHICH fiscal
policy?
CONTRACTIONARY POLICY.
Can we afford to undertake
such a policy at this
particular point?
So what should we do?