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POSC 182 Lecture 18 2010

POSC 182 Lecture 18 2010 - POSC 182 Politics and Economic...

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POSC 182: Politics and Economic Policy Unit 3: Policy Tools and Divergent Economic Philosophies Lecture 18: Business Cycles and Economic Philosophies February 17, 2010
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Real GDP per Capita in the US Real GDP per Capita = Inflation adjusted average incomes
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Keynesianism In the 1930s, the Great Depression hit. 25% unemployment and a 30% reduction in real GDP led to the idea that the economy did not regulate itself Consumers and businesses may get into a spiral of not spending/investing, which would lead to less growth and less spending – aggregate demand became important Policy prescription: Countercyclical fiscal policy Temporary deficit spending was desirable during recessions in order to fill the gap in aggregate demand left by consumers and firms that cut back spending/investment too far. During expansions, debt should be repaid. Government spending could spur further spending in the private sector, which could multiply the effect on the economy of each dollar spent by the government (multiplier effect)
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The Case for Keynesianism: The Great Depression Trend Surplus/Deficit Real GDP 0
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Political Implications of Keynesianism Once policymakers were convinced that deficits were not necessarily bad, how did that change the fiscal policy of the government? People like low taxes and many government services So, deficits became commonplace It’s easy to pass on the debt to people who can’t vote yet
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US Budget Deficits (% of GDP) Party of administration when most of the budget decisions were made Republican Democrat Data from Federal Reserve, St. Louis Persistent Deficits.
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