IV.
Effectiveness of Fiscal Policy
A. Timing
1.
Determining when recessions begin is difficult.
a. Disagreement over
whether the U.S. was in
a recession from 1989-1991 resulted
in little
fiscal action
being taken.
b. The 2001 slowdown happened so fast there
was not time for preemptive action.
2.
Fiscal policy takes time to implement
3. There will be a
delay because it takes business
time to expand capital investment.
B. Political
considerations
1.
Some spending programs are difficult to cut
(social security,
military, education).
2.
Expansionary bias: people vote to spend but
not to tax.
3.
Political business cycle: it is difficult
to accomplish anything
economically
constructive during
an election year
C. Recently, many
felt the federal
debt is too big
and has rendered fiscal policy ineffective.
Its success in
ending the 2001
recession has
yet to be determined although the Federal
budget surplus certainly makes it easier to
increase federal
spending and decrease
taxes although the expense of fighting three
wars has
again increased the deficit.
D. In 2012 People Fear the
Drag of Taking Away
the
Stimulus of 2009- 2011.
E.
Kansas Fiscal Policy
Tax Cut Failed
10/
24/17
Barry Ritholtz
F.
Fed Uncertainty In Assessing The Economic Effects Of Tax Cuts.
See Chart State and local cuts have very nearly run their course at this
point, but the economy now faces the run-off of stimulus programmers, as well as
the expiration of emergency unemployment benefits and, potentially, the
expiration of lots of other tax proposals. The President's latest plan aims to
move the total government impact on growth from a drag of about 1.5 percentage
points of GDP to approximately even. When the economy is growing at between 1%
and 2% per year, a 1.5 percentage point drag on output is a very big deal
indeed.
See
Government Spending Might Not Create Jobs Even During Recessions
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Editor's Note: Fiscal Policy and the
Great Recession
A world-wide saving glut developed in the late 1990's as the Asian Crisis caused
developing nations to be more conservative and accumulate mostly dollar
reserves. Their resulting lack of demand created a positive trade balance
and the need to create demand else ware to soak it up. The US did it's
part with two |
unfinanced wars, a tax cut, and private debt expansion. In the initial months of
the stimulus, the net government contribution to GDP growth was positive. As the
severe recession impacted government budgets, however, state and local cuts
mounted, ultimately offsetting stimulus at the national level.
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