MACRO E conomics Unit 10: Fiscal Policy in Practice- The U.S. Federal Budget Created: Sept 20 by Jim Luke. Creative Commons License, NC-AS.

MACRO E conomics Keynesian Successes & Failures  Success –Ended Great Depression –Mild recessions ever since  “Fine tuning” appeared to work: 1950’s & 1960’s –Short, mild, infrequent recessions –Low inflation – Stagflation of 1970’s – “Military Keynesianism”  Political & Economic Opposition

MACRO E conomics Problems with Aggregate Demand Management – What’s the Best Policy? Automatic vs. Discretionary Policy Response? Fiscal vs. Monetary Policy

MACRO E conomics Implementing the Right Discretionary (Stimulus) Policy  Estimating size of problem – what is “full employment”?

MACRO E conomics Stimulus Implementation Problem: Time lags  Recognition – Political agreement – implementation – multiplier time

MACRO E conomics Tax-based Stimulus Works Best When Not Seen as Temporary  Current vs. permanent income

MACRO E conomics AD Management is Weak against Supply Shocks

MACRO E conomics Political Issues with AD management:  Political business cycle  Which type of stimulus?  Tax cut? Or Spending Increase?  Whose taxes? Which spending?

MACRO E conomics The Budget Balance: Deficit vs. Surplus

MACRO E conomics Federal Budget Budget refers to a particular year’s incomes and outflows –Same as income statement or profit-and-loss statement for a person or firm. –Particular “fiscal year”.“fiscal year”. –Government fiscal years run from Oct 1 to Sept 30 The Budget Balance refers to whether income exceeds outflow

MACRO E conomics Deficits & Surpluses Change Debt Deficits add to Total Debt Surpluses reduce Total Debt

MACRO E conomics What Is The Social Security Program? Started in Great Depression Intergenerational transfer / social insurance program all developed, industrialized nations have one

MACRO E conomics How Does Social Security Work? Intergenerational transfer program: current workers pay current retirees NOT a savings or retirement investment program NOT like a 401(k) or an IRA. Current retiree benefits provided by taxes paid by current workers. Amount of benefits that can be paid depends upon: Ratio of workers per retiree How much workers earn Tax rate on payroll

MACRO E conomics What Is the Social Security Trust Fund? By law, the Social Security Administration is required to “invest” the Social Security Trust Fund in U.S. Government bonds.

MACRO E conomics Will Social Security ‘Be There’ When You Retire? YES, unless Politicians choose to take it away.