Economics Notes

25 Lessons Learned for our Fiscal Future

Demographics Drive Our Long-term Fiscal Challenges
Popular Options, Like Cutting Waste, Fraud and Abuse or Growing Our Way Out of Debt, Are Not Enough
The Independence and Credibility of the CBO Are Essential
The American People, if Presented with Credible and Understandable Information, Can Make Tough Fiscal Policy Trade-offs
Making Health Care Programs Sustainable Depends on Controlling Costs
Doing Nothing Is Not a Plan to Fix Social Security
Trust Fund Accounting Obscures Fiscal Problems of Social Security and Medicare
It’s Important to Distinguish Between Short-Term Cyclical Deficits and Long-Term Structural Deficits
Bipartisan Policy Changes Can Put the Debt on a Downward Trajectory
It's Easier to Correct Overshooting on Deficit Reduction Than Undershooting
A Balanced Budget Amendment to the Constitution is Not Necessary for Responsible Fiscal Policy
Tax Cuts Don't Pay for Themselves
The Debt Limit is More Trouble Than It’s Worth

III. Automatic stabilizers A. Cause the economy to expand without government action during recession by increasing AD. B. Cause the economy to contract without government action during inflation by lowering AD. C. fiscal policy & automatic stabilizers - 8 min. D. Examples 1. Transfer payments (unemployment compensation, food stamps, and other social programs) increase during recession to increase AD. 2. Progressive taxes (income tax) increase during inflation to lower AD. 3. Importance of Automatic Stabilizers
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 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
Federal Expenditures Lagged After 2007 Great Recession Recovery	Great Recession Recovery Also Lagged Full Employment: Are We there Yet?
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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Are We Turning the Fiscal Policy Dials the Wrong Way?

I. Economic Goals of the U. S. Employment Act of 1946 began reaction to five-year Soviet Union economic plans. A. Set four economic goals a. Economic growth b. Price stability c. Low unemployment d. Positive balance of payments B. Created Council of Economic Advisors conomic C. Humphrey–Hawkins 1978 Full Employment Act set specific goals 1. Set five-year goals for economy 2. Specific goals a. 4% unemployment b. 3% inflation by 1985, 0% by 1988 c. Reduce balance of payments deficit d. Increase economic growth and investment e. Reduce the size of the public sector D. Government Policy Options to Meet Goals 1. Fiscal policy, the focal point of Keynesian economics, is this chapter's topic. a. Discretionary fiscal policy b. Automatic stabilizers 2. Monetary Policy will be covered in chapter 15. 3. Appropriate Fiscal Policy leads to noninflationary Full Employment E. Some History a. The Employment Act of 1946 b. 70 Years of Advising the President by the CEA II. Discretionary Fiscal Policy A. Discretionary fiscal policy is the deliberate manipulation of government taxing and spending to control AD and the business cycle. B. AD = C + I + G + X_NC. Expansionary fiscal policy consists of reversing an economic downturn by increasing AD with deficit spending. 1. Lower taxes to increase Consumption (C) and Investment (I) a. Personal income taxes b. Capital gains taxes paid on the profit from the sale of commercial real estate, a company, and financial assets (stocks and bonds) c. Investment tax credit which is a direct lowering of the tax liability of companies investing in certain approved types of plant and equipment 2. Increase government spending (G) 3. The result is a fiscal stimulus through deficit spending. 4. The impact of a fiscal stimulus will affect AD. 5. Fiscal policy and the multiplier... is an 9 minute video D. Concretionary fiscal policy: Decreasing inflationary pressure by decreasing AD 1. Increase taxes 2. Decrease government spending 3. A fiscal drag with smaller deficits or a surplus results. E. The multiplier effect described in chapter 12 applies to fiscal policy measures. F. Loanable Funds and Crowding Out of Private Investment 1. Government borrowing fiscal policy to expand economy raises demand for loanable funds increasing interest rates which crowds out/lowers private investment which slows the economy 2. Concise Video 3. Expanded Video 9.32 minutes G. How L.B.J. Pushed Through Kennedy’s Tax Cut BY BRUCE BARTLETT FEBRUARY 4, 2014
	Source has much data Are We Turning the Fiscal Policy Dials the Wrong Way?