2 ways to do so g andor t in 1985 congress passed the

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2 ways to do so: G↓ and/or T↑ In 1985, congress passed the Gramm-Rudman-Hollings amendment, which may go down in American Economic history as the last best hope of the 20 th century to balance the federal budget. This law stipulated that the deficit be reduced by about 30 billion a year until fiscal 1993, when the budget would be balanced. Each year, Congress was supposed to pass a budget with a deficit within 10 billion of the legal target. If it didn’t, then the president was required to make the necessary spending cuts. - 1987 the deficit = 150 billion Did this law fail? Not necessary - 1993 the deficit = 320 billion See the alternative – without the law - Balance the budget - G↓ – almost impossible - T↑ – not possible, e.g. George Bush “Read my lips” Reducing the deficit through economic growth If the economy was growing, say, at an annual rate of over 3% a year. and if G were held to less than the growth rate, then the deficit would actually begin to decline. Another reasons to be skeptical about plans to cut the deficit is the savings and loan bailout as well as failing commercial banks and a Federal Deposit Insurance Corporation The Automatic Stabilizers In the 1930s we built a few automatic stabilizers into our economy, mainly to prevent recessions from becoming depressions. When there is a recession today, neither the President nor Congress needs to do anything. All the machinery is in place and ready to go. The automatic stabilizers protect the economy from the extremes of the business cycle. To do still more, we need discretionary economic policy. Personal Income and Social Security Taxes During prosperous times, our incomes rise and during times of inflation, our incomes tend to rise still faster. As our incomes rise, we have to pay more
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taxes. These taxes tend to hold down our spending, relieving inflationary pressures. During recessions, as incomes fall, tax receipts fall even faster. This moderates economic declines by leaving more money in taxpayers’ pockets. Personal Savings Recessions: Layoffs S↓ (N.B) C rises as a % of income during recession Prosperity : Employment S↑ tend to damp down inflationary pressures Credit Availability Recessions: Credit cards give us one more source of funds with which to keep buying things Inflationary: Good times are times for paying credit card depts. Unemployment Compensation When you lose your job, you can sign up for unemployment benefits if you qualify. Recession: Unemployment benefits↑ Sometimes during recessions, Congress will extend the benefit period beyond 26 weeks to 39 or even 52 weeks in certain cases. This action is part of discretionary policy, since it does not happen automatically. The Corporate Profits Taxes Perhaps the most countercyclical of all the automatic stabilizers is the corporate profit tax. Corporations must pay 34% of their net income, above $75,000 to the federal government.
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