Fiscal Policy

1. Fiscal Policy Revenues & Expenditures

2. Essential Standards • The student will explain how the government uses fiscal policy to promote price stability, full employment and economic growth. • The student will define fiscal policy. • The student will explain the government’s taxing and spending decisions. • The student will describe the difference between the national debt and government deficits. • The student will explain how changes in fiscal policy can impact an individual’s spending and savings choices.

3. Fiscal Policy • Fiscal Policy is determined by two government actions: • Collecting revenue. • Authorizing expenditures. • Both actions are controlled by the… • US Congress.

4. Which of the following is the best example of a decision involving revenue? iRespond Question Multiple Choice F 5A2F7991-D993-664D-AF9B-FE6073A05F5E A.) the EPA passing new limitations on pollution. B.) Congress' decision to raise marginal tax rates to 36%. C.) the President’s support for a new highway-construction bill. D.) a new law that limits the importation of Ecuadoran bananas. E.)

5. Which of the following is the best example of a decision involving government expenditures? iRespond Question Multiple Choice F 9849458A-0AA0-D648-98C2-B0F7C8E8082B A.) the institution of a "payroll tax holiday" that temporarily cancels social security deductions. B.) the institution of a permanent ban on all US trade with Russia. C.) the elimination of the so-called "death tax" for families with a net worth of less than $1 million. D.) the development of a high-speed rail line between California and Texas. E.)

6. Expansionary Fiscal Policy • Congress uses expansionary policy to raise the GDP… • Which can pull the economy out of a recession. • To do this, they have two methods: • Increase expenditures. • Or cut taxes… • If the economy is in HORRIBLE shape, Congress might do BOTH.

7. Contractionary Fiscal Policy • Sometimes an economy grows TOO QUICKLY… • Which can cause runaway INFLATION. • So Congress might use contractionary policy to COOL THINGS OFF. • There are two methods: • Cut expenditures… • Raise taxes.

8. In terms of fiscal policy, tax cuts are thought to be... iRespond Question Multiple Choice F 30D1513C-8348-054A-918E-04B58C103A21 A.) expansionary B.) contractionary C.) D.) E.)

9. In terms of fiscal policy, increases in expenditures are thought to be... iRespond Question Multiple Choice F 7F2DCC39-0CB8-C44C-82A5-F6B9B3D144A3 A.) expansionary B.) contractionary C.) D.) E.)

10. Fiscal Policy: Classical Economics • Was the philosophy in the US from 1776 through 1932— • It is based on the ideas of Adam Smith… • When the economy is in trouble… • The government should DO NOTHING… • Keep its HANDS OFF, and the “invisible hand” would fix any problems. • But the Great Depression (1929-1947) raised this question: • HOW LONG DOES IT TAKE FOR THE INVISIBLE HAND TO GET BUSY?

11. Demand Side (Keynesian) Economics • Was developed in the 1930’s by British economist John Maynard Keynes… • Who argued that the government was PART of the economy… • And in times of recession or depression… • The government should INCREASE EXPENDITURES… • Build bridges, highways, hospitals, schools, airports, dams, etc… • Which would CREATE JOBS… • And pull the economy OUT OF TROUBLE.

12. Supply-Side Economics • Supply-siders believe that taxes HURT the economy. • And in times of recession or depression, TAX CUTS are essential. • Tax cuts increase demand… • Which increases business profits… • Which causes businesses to hire more workers… • And the government collects MORE MONEY… • Even though tax rates are LOWER.

13. In reaction to an economic downturn, Congress announces a package of massive tax cuts. Such a policy is in line with... iRespond Question Multiple Choice F C02D47C4-0FA7-7C46-A1C4-EE780AEA83E0 A.) classical economics. B.) supply side economics. C.) demand side economics D.) E.)

14. In reaction to an economic downturn, Congress passes a stimulus package that includes billions of dollars in funding for highway construction. Such a policy is in line with... iRespond Question Multiple Choice F A41C73C6-033C-F242-9411-A4A8D82CB0FB A.) classical economics. B.) supply side economics. C.) demand side economics. D.) E.)

15. Do These Policies Work? • Keynesian (or Demand-Side) Economics calls for increased SPENDING during recessions… • But where is that money supposed to come from? • Keynesian doctrine also calls for SAVING during expansions. • However, the government is never able to achieve the discipline necessary to SAVE when the economy is strong… • So when the economy takes a downturn, the government is forced to BORROW MONEY, which increases the NATIONAL DEBT. • Supply-siders call for TAX CUTS when the economy is in recession… • But if the government REDUCES its revenues, it must keep spending under control… • However, out-of-control spending has become the US government’s trademark… • Which forces the government to BORROW MONEY, which increases the NATIONAL DEBT. • So although both theories look good on paper, they have actually never worked in practice.

16. Surpluses & Deficits • Budgetdeficit—expenditures EXCEED revenues. • Budget surplus—revenues EXCEED expenditures… • The US has been running a deficit for the last several years… • Leading to a huge national debt.

17. The National Debt • Is the total amount of money the federal government owes to bondholders. • Every year that the government runs a deficit, it must borrow money to operate. • To borrow money, the government sells US Bonds (they are sometimes called SECURITIES). • Individuals and nations all over the world buy them… • Because they are viewed as some of the safest in the world… • The US is stable and has never defaulted on its debt.

18. The National Debt, as of 22 Mar, was…. Your personal share (if you are a US citizen) is… $59,553.13 Since September 30, 2012, the National Debt has increased by a DAILY average of… $2.48 BILLION

19. Government Spending • National Defense—20%. • “Spending reductions would put our troops in harm’s way.” • Social Security—20%. • “Social Security is the ‘third rail’ of American politics.” • Medicare & Medicaid—20%. • “We can’t balance the budget by refusing to care for the sick”. • Safety Net Programs—20%. • “We’re going to balance the budget on the backs of the ‘most vulnerable’ members of society? NO.” • Interest on the national debt—10%. • Failure to pay interest would result in default, causing an economic catastrophe. • And the rest is peanuts.

20. Why is the National Debt a Problem? • If I give a loan to a person I think is a HIGH RISK borrower… • I will demand a high rate of interest to compensate for that risk. • Historically, the US government was considered LOW RISK… • And was only required to pay LOW RATES of interest. • However, our skyrocketing national debt has started to make lenders NERVOUS… • So they have started to require HIGHER rates of interest. • But high interest rates cause the debt to increase MORE RAPIDLY… • Which makes lenders MORE NERVOUS… • And so on.

21. How Do We Fix The Problem? • Debt can be paid down by two methods: • Decreasing expenditures… • Or increasing taxes. • However, this action exactly matches WHICH fiscal policy? • CONTRACTIONARY POLICY. • Can we afford to undertake such apolicy at this particular point? • So what should we do?