Transcript Fiscal Policy - SteveTesta.Net

Fiscal Policy
Bell Ringer
• Suppose you are a part of state school board that has
already decided to help disadvantaged students obtain
further education. Choose one of the following options
for how the aid will be delivered.
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A. $7000 voucher for tuition
B. $7000 worth of government provided school
C. $7000 in cash to use for tuition
D. $7000 refundable account
E. $7000 worth of education tax credit
Fiscal Policy
• Consists of increasing or decreasing
government taxing and spending in order
to control economic activity.
• OR
• Fiscal policy manipulates aggregate
supply and aggregate demand with
government action.
Who?
• President and executive agencies through OMB ask for
funding.
• Congress and the CBO appropriate laws.
• President signs legislation.
• Agencies spend.
Goal
• To smooth out the natural curves of the business cycle.
US pattern has
been steady
growth over the
past century
Expansionary Policy
• Government Spending
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Provide public services
Programs for business growth
Subsidize business costs
Increased profits
• Taxes
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Business savings
Public savings
Wages up
More spending
Aggregate demand increases
Driving up prices (inflation)
Suppliers produce more
Unemployment levels decline
Contractionary Policy
• Government Spending
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Business cost go up
Infrastructure lags
Lay-offs and pay cuts
Low investment
• Taxes
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Lower business profits
Less disposable income
Decreased leverage
Decline in innovation
Aggregate demand decreases
Prices fall
Production declines (recession)
Unemployment rises
Limits of Fiscal Policy
• Difficult to change spending habits
• Predicting, debating, passing laws
• Delay, funding, bad timing
• Political pressure, special interests
• Coordination (levels, regions, FED)
• Short vs. long term results
Politics of Fiscal Policy
Government
Private Sector
• Big picture
• Self-interest
• Organization
• Incentives
• Vision
• Competition
• No profit motive
• Regulation?
National Debt
• Debt - Cumulative total of deficit spending year after year
• Owed to those who hold federal government securities
• Economists concern is lack of investment capital
• Economists keep track of it as a % of GDP
• Deficit – spending that exceeds revenues from year to year
Reflection
• Review the answer you wrote about the state school board
decision, and the notes about how fiscal policy is a balance
of government taxing and spending. Do you still agree with
your previous position or do you think another solution
might be favorable? Explain
• A. $7000 voucher for tuition
• B. $7000 worth of government provided school
• C. $7000 in cash to use for tuition
• D. $7000 refundable account
• E. $7000 worth of education tax credit
Classical Economics
• Laissez Faire – hands off
Keep government from the economy
• Free markets self correct
• Natural market forces of AS and AD
• Business cycle ebs and flows normally
PRACTICE
• Hoover did nothing
• Depression was too severe
• Economy did not correct with falling prices
• Equilibrium corrections took too long
Keynesian Economics
• THEORY
• Increase aggregate demand
• Business won’t spend with prices falling
• Consumer won’t spend because of fear
• Government should spend
• It could borrow
• It had an incentive
• Make the economy work and win reelection
AD = C+I+G+(X-M)
• Consumption
• Investment
• Government
• Net Exports
• Total Exports
• Total Imports
Practice
• The Great Depression
• FDR
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The New Deal
WWII Funding
New borrowing
Heavy Debts
Automatic Stabilizers
Supply Side Economics
• Taxes hurt economic growth
• Targeted tax cuts will stimulate growth in specific areas
• Tax cuts encourage entrepreneurship
• Taxes discourage unwanted behavior
Reaganomics
• Practice
• Shrink government
• Grow business
• $ trickles down
• Result (1980-92)
• Economy grew
• Income gap increased
• Debt increased
Laffer Curve
• Measures total taxes collected as a percentage of the
tax rate
• Lower rates – incentive to make more $
• Collect more tax revenues
• Higher rates – disincentive to make $
• Lose tax revenues
• Where is the Laffer Curve?
Effect of Tax Cuts on
Revenue
Total Tax
Revenue
0%
100%
Tax
Rate
Effect of Tax Cuts on
Revenue
Total Tax
Revenue
Tax
Cut
0%
Current
Tax Rate
100%
Tax
Rate
Effect of Tax Cuts on
Revenue
Total Tax
Revenue
Increased Revenue
Tax
Cut
0%
Current
Tax Rate
100%
Tax
Rate
The Effect of Tax
Cuts on Revenue
Total Tax
Revenue
Decreased Revenue
Tax
Cut
0%
Current
Tax Rate
100%
Tax
Rate
The Effect of Tax
Cuts on Revenue
Total Tax
Revenue
Tax
Cut
0%
Current
Tax Rate
100%
Tax
Rate
Politics
• Both Parties believe in Keynesian
• Argue over what to spend the money on
• Both Parties believe in Supply Side
• Argue over who gets the tax breaks
• Do these policies really matter?
• Somewhat
• Is there a another way?
• Monetary Policy