Fiscal Policy

How much money does the Federal Government spend . . . . . . Every Year? $2.3 Trillion Dollars That’s $2,300,000,000,000 . . . Every Day? $6 Billion or $6,000,000,000 . . . Every Hour? $250 Million or $250,000,000 That’s about $4.2 Million every minute and $70,000 every second

Fiscal vs Monetary Fiscal Policy is the way the government collects and spends revenue to influence the economy. Changes in federal government spending or taxes designed to promote full employment, price stability and reasonable rates of economic growth. Monetary Policy is the actions the Federal Reserve takes to influence inflation and the GDP. Decisions that lead to changes in the supply of money and the availability of credit.

Federal Budget The Office of Management and Budget (OMB) spends the year collecting data from all parts of the Federal Government on how much money they need next year. Then they advise the President on what everyone reported The President proposes a budget Congress then looks at and changes it and eventually proposes a modified version Congress then adds appropriation bills that add new spending to the budget for specific projects The President then signs it into law or vetoes it.

Expansionary Policies Fiscal policies that encourage economic growth Government spending more Tax Cuts Designed to increase aggregate demand Intent to increase GDP and reduce unemployment

Contractionary Policies Fiscal policies that reduce economic growth Government spending less Tax increases Designed to decrease aggregated demand Intent to control inflation

Limits of Fiscal Policy Can only change Discretionary Spending (about 38% of budget) Hard to predict the future Results not immediate Political Pressure Coordinating with States

Fiscal Policy Options Classical Economics – Free markets regulate themselves If we leave the economy alone, it will eventually work itself out. This is how we did it, UNTIL the Great Depression

Fiscal Policy Options 2. Keynesian Economics (a.k.a. : Demand-Side Economics or Traditional Economics) - Government action should be used to increase or decrease demand - For example, if there is a depression, only the government has money. So the government should use that money to increase demand

Fiscal Policy Options 2. Keynesian Economics (continued) - Increasing taxes and reducing spending lowers consumer demand - Decreasing taxes and increasing spending increases consumer demand Multiplier Effect – If the government spends $1 it has more than a $1 effect on the economy

Fiscal Policy Options 3. Supply-side Economics - Government Action should be used to increase or decrease supply - Increasing taxes lowers companies supply - Decreasing taxes increases companies supply

U.S. Fiscal Policy History World War II – Increased spending by Government on war goods, increased demand. - Result: Great Depression ends, economy booms

U.S. Fiscal Policy History B. Kennedy Administration – Economy going well. Chief Financial Policy Advisor: Walter Heller convinces Kennedy to cut taxes to decrease unemployment rate. - Result: Economy grows rapidly

U.S. Fiscal Policy History Supply Side Policies of the 1980’s Ronald Reagan enacts Supply-side policies to end high inflation of the 1970’s Does NOT want to spend (and increase demand) to fix economy Used Federal Reserve to tighten money supply Result: Economy Recovers However: During Reagan years government spending rises every year.