Topic12-Fiscal Policy_AAPBW6_Rev

Employment because idle resources may be put to work

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: umstances Defense, regulation, internal security (police, fire fighters, homeland security), legal system, funding of basic R&D, and many others Transfers At best a transient short-term fix shortThis kind of increase in GDP does not mean GDP that people are necessarily better off! Goes back to the short-term neutrality shortdiscussion Temporary reductions in output and employment may be optimal Fiscal policy is a blunt and broad weapon! Also outcome of the political process Some have the character of a public good 16 19 “Multipliers” Budget Debt and Deficits • Question: • A term that has come back into use with the current situation • If you spend $1 government, by how much does GDP go up? It depends on the economics situation and where and how firmly you fit in the conviction spectrum Are deficits a good thing? Should we worry? • Deficit financing is one of the three BIG issues in fiscal policy • The Others? Social Security, Medicare/Aid Social Is SS going bankrupt? Do we have to change the system? Can we sustain Medicare/Aid? 20 23 “Multipliers” Budget Deficits • At “full employment” mult = 0 or mult < 0! • If you spend the $1 in transfers the multiplier ought to be less than if you spend it directly • Barro in a recent article claims that over WWII, the government spending multiplier was 0.82 • A lot of the discussion before passing Obama’s relief package was about multipliers Different assumptions give different answers • Government outlays (spending): Government purchases (G) Transfer payments (TR), and Net interest payments (INT) • The budget deficit is then defined as: deficit = outlays - tax revenues Deficit = (G + TR + INT) - T TR INT • Primary deficit excludes net interest from government outlays = (G + TR) - T TR 21 24 Example #1 Budget Debt and Deficits • Governments all over the world borrow to finance a shortfall of revenue compared to expenses; some of reasons: Don’t have to raise taxes now Don’ Taxpayers can postpone payment Finance capital projects Finance large transient expenditures Unable to collect taxes • Let Gov. purchases SS payments Welfare payments Interest on Debt Income taxes Corp taxes SS & Medicare levies = 300 = 200 = 100 = 30 = 220 = 40 = 140 • What are government spending and receipts? • They borrow in their own currency and they borrow in foreign currency 22 Gov Spending = Gov Receipts = 25 Debt Example #1 • The accumulated budget deficit is the accumulated national debt. Deficit is a flow, debt is a stock • Let Gov. purchases SS payments Welfare payments Interest on Debt Income taxes Corp taxes SS & Medicare levies = 300 = 200 = 100 = 30 = 220 = 40 = 140 Not all government borrowing shows up in the “unified” budget unified” Differences between state & Fed budget processes • A useful measure is the Debt-GDP ratio Debt From the 1980s until recently, federal government spending far outstripped revenue, causing the debt to double from its 1980 level...
View Full Document

Ask a homework question - tutors are online