MACRO
Economics
Unit 10:
Fiscal Policy in Practice- The U.S.
Federal Budget
Created:
Sept 20
by Jim Luke.
Creative Commons
License, NC-AS.
MACRO
Economics
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
Economics
Problems with
Aggregate Demand Management –
What’s the Best Policy?
Automatic vs. Discretionary Policy
Response?
Fiscal vs. Monetary Policy
MACRO
Implementing the Right
Discretionary (Stimulus) Policy
Economics
 Estimating size of problem – what
is “full employment”?
MACRO
Stimulus Implementation Problem:
Time lags
Economics
 Recognition – Political agreement
– implementation – multiplier time
MACRO
Tax-based Stimulus Works Best
When Not Seen as Temporary
Economics
 Current vs. permanent income
MACRO
AD Management is Weak against
Supply Shocks
Economics
MACRO
Political Issues with AD
management:
Economics
 Political business cycle
 Which type of stimulus?


Tax cut? Or Spending Increase?
Whose taxes? Which spending?
MACRO
Economics
The Budget Balance: Deficit vs. Surplus
MACRO
Economics
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”.
– Government fiscal years run from Oct 1 to Sept 30
• The Budget Balance refers to whether income
exceeds outflow
MACRO
Economics
Deficits & Surpluses Change Debt
• Deficits add to Total Debt
• Surpluses reduce Total Debt
MACRO
Economics
What Is The Social Security Program?
• Started in Great Depression
• Intergenerational transfer / social insurance program
• all developed, industrialized nations have one
MACRO
Economics
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
Economics
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
Will Social Security ‘Be There’
When You Retire?
Economics
YES,
unless Politicians choose to take it
away.