Chapter 12 - FISCAL POLICY
See opening quote, page 267.
We now look at Fiscal Policy. We assume that the money supply (MS) is fixed,
monetary policy is held constant so we can isolate and focus on fiscal policy only.
= Tax policy (T) and government spending (G) by the President and
Congress, with the intention to affect the economy - promote growth, achieve low
Budget Deficits and Surpluses - Since fiscal policy involves a) setting tax policy to
generate tax revenue (T), and b) federal spending (G), we start by discussing Budget
Surpluses and Deficits.
Balanced budget =
Govt. Revenue (taxes, tariffs, fees) = Govt. Spending, (T = G)
Budget Deficit =
Govt. Spending (G) > Govt. Tax Revenue (T)
= Govt. Revenue (T) > Govt. Spending (G)
See back of book, From 1960-1997 we have had a deficit
(close to a balanced budget), and 1969 (surplus). From 1998-2001 we had budget
Budget Deficit vs. National debt
- Budget Deficits occur in
years when G > T, have averaged between $100-200B per year in the 80s and 90s.
The National Debt is the accumulation of past budget deficits, which is now (2003)
over $7000B or $7T.
The federal budget is the primary tool of fiscal policy - attempt at stabilization and
fine-tuning. Budget deficits can change for two reasons:
1. Passive budget deficits -
without a change in fiscal policy, deficits can reflect
current state of the economy.
: deficit increases during recession. Tax
receipts (T) are down during recession and govt. spending (G) increases. During an
expansion, T goes up and G goes down due to the strong economy, leading to a
smaller deficit, or a budget surplus which we currently have in U.S.
2. Active Budget deficits
- result from deliberate,
discretionary fiscal policy
policymakers plan the federal budget with the intention to spend more than they plan
to take in (G > T, leading to a deficit)
U.S. budget deficits are mostly from discretionary fiscal policy, and when we talk
about a "change in fiscal policy," we are referring to a change discretionary fiscal
policy that affects the deficit or surplus.
KEYNESIAN VIEW OF FISCAL POLICY
Before Keynes (and up to the 1960s), balanced budgets were generally accepted by
politicians and the public as the responsible thing. Keynes challenged the desirability
of balanced budgets. Argued that federal budget should be used to promote AD/full
employment, especially during a recession.