Chapter 13. Fiscal Policy Link to syllabus Plus page 538 -
Supply Side Economics and the Laffer Curve.
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Government Spending and Taxes/GDP. Fig 13-1 p. 378
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Breakdown of US Government Taxes and Spending, 2007. Figs. 13-2
and 13-3, p. 379 (Seems to be total govt)
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Michigan Taxes & Spending Michigan Taxes
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Figure 13-6. p. 384 The 2009 Recovery Act. (billion $)
Financial bailouts are not included here.
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Hypothetical Effect of Fiscal Policy. Tab. 13-1 p. 386 MPC is
0.5. Minor detail: the right hand column is less than the middle
column, because people dont spend the total amount of the transfer.
Nevertheless, the multiplier is always positive.
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The US Federal Budget Deficit and the Business Cycle. Figure
13-7, p. 391 The (absolute and relative) size of the deficit
increases during recessions, and falls during expansions. This is
only partially due to countercyclical spending.
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The US Federal Budget Deficit and Unemployment. Figure 13-8, p.
391.
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The Actual Budget Deficit versus the Cyclically Adjusted Budget
Deficit. Fig. 13-9, 392
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Recall: Fig. 10-5 p. 286. An Increase in the Demand for
Loanable Funds. Standard example; increased government deficit,
financed internally Govt Spending Interest Rates Business
Investment Crowding out reduces or eliminates Positive AD effect of
govt spending
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U.S. Federal Deficits and Debt/GDP. Fig. 13-11 p. 398 x
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US Debt/GDP source: Statistical Abstract of US
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Data on US Government Debt 2002 2011 Total $(trillion) 6.4 14.8
Privately held 3.0 8.4 Held by Foreigners 1.2 4.7 Foreign/Total (%)
19 32 Foreign/Private 41 55 Source: Calculations based on data from
US Treasury
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Japanese Deficits and Debt/GDP. Fig. 13-12 p. 371
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Global Comparison p. 396. Debt Levels Other countries like
Norway: UAE, Saudi Arabia, Kuwait
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Future Demands on the Federal Deficit. Fig. 13-12, p. 400 mt
believes it is irresponsible to include 80 year projections,
because so much can and will change.
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US deficits, 1930-2010 Data from U.S. CBO x
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Review of Deficit/Debt, by Presidents For a long time, balanced
budget was the goal. This was changed by Roosevelt, and re-enforced
by Kennedy/Johnson The deficit grew dramatically under Reagan. This
was caused by his tax cuts, increased defense spending, and the
contractionary policies of the Federal Reserve Bank. Under Clinton,
the deficit was turned into a surplus. Perhaps this was due to good
policies. Republicans would claim that it was due to their not
letting him spend in areas like Health Care. A major contributor to
the non-re-election of George H Bush was his promise of No new
taxes, which he broke.
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Deficit under George W. Bush When W. was elected, all
projections were for surpluses as far as the eye can see. As a
candidate, W. promised tax cuts, and implemented one quickly after
entering office, mailing tax refunds to citizens. The crisis of
2008 dramatically worsened the deficit. The majority of economists
would probably agree that the overall impact of W.s tax cuts was
regressive, i.e. lowering taxes more for the very wealthy. The
Obama administration is currently in debates with Republicans about
extending or reversing those taxes.
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Why did the Clintons government surplus turn into deficit under
President Bush? 1.Economic slowdown (39%) 9-11 Bubble economyEnron,
World.com, Increasing competition from overseas producers 2. Tax
cuts (27%) 3. Greater spending on Iraq, Homeland security (19%) 4.
Others (15%) Analysis according to Henry Aaron (Brookings Inst.)
Source:
http://www.brookings.edu/dybdocroot/views/testimony/aaron/20040204.pdfhttp://www.brookings.edu/dybdocroot/views/testi
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The Deficit under Obama Near the end of the President Bushs
term, it became clear that massive steps were needed to avoid a
financial meltdown, and the Bush/Paulson requests for these were
approved by Congress. These actions involved expansionary spending
and transfers, and bailing out banks and auto companies. These
programs were continued under President Obama, with Fed Chief
Bernanke and Treasury Secretary Geithner providing continuity. It
is inevitably the case that some of those actions were not taken
with sufficient care and forethought. It is also the case that
Obama did not get as much as he wanted from Congress.
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Current Issues It is very difficult to predict what will happen
to the deficit: a. Tax revenues decline in a recession are we in a
double dip recession? b. Some of the massive increase of the
deficit was caused by the massive bailouts. This was one-time-only
spending, so the deficit will be reduced if there are no new
bailouts. c. The actual dollar amounts of those recent major
bail-outs will not be known for a while, until all the accounting
is in, and we know what value the government receives for
re-selling the companies. d.The 2010 election saw the rise to power
of anti-deficit [tea-party] hawks, who want to stop the bail-outs
and other expansionary (but deficit-creating) programs, and lower
some taxes. e.With Obamas re-election, his policies wont change.
Mitt Romney offered the prospect of a replay of the experience with
Reagans supply side policy of aggressive tax cuts.
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White House and CBOs Deficit Projections, 2009 Source:
Washington Post March 21, 2009
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Gramm Rudman Hollings Act, 1985 (and revisions) Set up a
multi-year schedule of targets for reduction of govt deficits. If
the deficit didnt meet the targets, there would be automatic cuts -
sequesters - and these automatic cuts would not touch defense nor
Social Security. Was declared unconstitutional by the Supreme
Court, as it gave somebody (the computer programmer for the
Congressional Budget Office) power over both the Legislative and
the Executive branches. Also, Congress ignored rules during wars
and emergencies. Importance: Seemed to be the last chance at
achieving this by legislation, short of a constitutional amendment.
Rudman to Congress: Im filing for divorce on the grounds of
infidelity and irreconcilable differences.
Slide 27
Unless the fractious U.S. Congress can strike a deal, about
$600 billion in U.S. spending cuts and higher taxes are due to kick
in on January 1, threatening to push the U.S. economy back into
recession and hurt world growth. Not only are tax cuts enacted
under President George W. Bush set to expire, but automatic
spending cuts designed to exert pressure on lawmakers to strike a
long-term budget deal will also take effect. The U.S. Congress will
also soon face the need to raise the nation's debt limit to avoid a
default. The reason the fiscal cliff is such a threat to 2013s
economy isnt that its too little deficit reduction its that its too
much all at once, 5.1 percent of GDP in a single year, which could
throw the economy into recession. Republicans agree on that.
Democrats agree on that. And in agreeing on that, both sides appear
to be embracing an argument thats been rather contentious in recent
years: that fiscal stimulus boosts short- term economic growth and
budget cuts hurt it.5.1 percent
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Deficit/Debt Debates: Scattered parts of Chapter 17 False
arguments: We have to pay it back (think a large corporation)
Federal government deficits cause inflation or unemployment
Potentially valid arguments against: Government deficits cause
crowding out, lowering business investment. We used to say we owe
it to ourselves, but this is becoming less true. Confusing aspects:
What measure of the debt to use all, or just that owned by the
public? What about social security, which is a commitment, but not
a debt? What about off-budget spending?
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(Different Textbook). The Laffer Curve, mentioned (without
graph) on p. 538 of Krugman/Wells. When the graph is not in our
textbook, its not on the exam. Laffer range Traditional range
Slide 30
Were Reagans tax cuts a fair test of the Laffer Curve? Early in
his term President Reagan cut taxes, and the deficit grew. Many
economists not just Keynesians believe this disproves Laffer.
However: 1) Although Reagan cut taxes to consumers, Congress did
not approve cuts in business taxes [Trickle Down Economics] 2) The
Federal Reserve, under Paul Volcker, applied contractionary
monetary policy, which presumably overwhelmed the tax cuts, because
the economy went into a recession. 3) Reagan also increased defense
spending. Note that K/W are rather dismissive of the Laffer radical
supply side story
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(other text). Federal budget surpluses and deficits
1992-2012