POSC 182 Lecture 19 2010

POSC 182 Lecture 19 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 19: Business Cycles and Economic Philosophies February 19, 2010
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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. Surpluses
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Federal Debt (% of GDP) DeLong
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Problems with budget deficits Undermines investor confidence in the government investors move to places with a lower risk of inflation since they may be afraid that the government will inflate away their debt. Financing a deficit can crowd out private borrowing and private investment Can raise interest rates, which can take away from economic activity
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Supply-Side Economics Friedrich Hayek’s legacy Assumed that the market was self-regulating Based on the idea that production/supply (not consumption/demand) is the main factor in real economic outcomes Assumed that lowering taxes may actually increase government revenues by spurring economic activity Prescriptions : Lower taxes, especially for segments of the economy that would invest and raise productivity • Move away from progressive taxes Get rid of capital gains taxes Few regulations / government intervention
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Criticisms of Keynesianism Smoothing the business cycle through fiscal policy comes at the expense of economic growth Fiscal policy may not be effective as stagflation in the 1970s
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POSC 182 Lecture 19 2010 - POSC 182: Politics and Economic...

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