Economics Reflections

Chapter 15: Fiscal Policy

Understanding Fiscal Policy
Fiscal policy is when the government controls spending and revenue collection to influence
the economy. Decisions on how to implement fiscal policy into the government are considered
during the creation of the federal budget every year. The federal budget indicates the amount of
money that the government is expected to receive and allots the amount that they can spend that
fiscal year. Both the executive and legislative branches must accept the federal budget. I think
that implementing fiscal policies is difficult because it is difficult for the government to change
their spending levels and predicting the future of the economy and knowing the current state of
the economy is difficult to calculate. The economy is always changing and because fiscal
policies usually have delayed results, they can only add more problems. I also think that it is
difficult for the branches and levels of government to coordinate together so that a fiscal policy
to be effective because each branch and level has their own concerns and goals. Despite these
challenges, the government will sometimes use expansionary and contractionary fiscal policies.
Expansionary fiscal policies are used to raise the level of output in the economy and include
actions in increased government spending and cutting taxes. Contractionary fiscal policies aim to
reduce the growth of economic output and include actions to decrease government spending and
raising taxes. I think that with the proper coordination, organization, and less political pressure,
fiscal policies would effectively influence the economy and help the economy remain stable.
Fiscal Policy Options
Classical economies, or an economy where the government had little influence, were
common, however the Great Depression challenged the role of the government in the economy.
It brought to light that the economy may take years to correct itself and that some form of
government intervention may be needed. This gave rise to a new theory of economics called
Keynesian economics. This theory looks at the productive capacity of the entire economy and
theorizes that the economy is made up of three sectors: individuals, businesses, and the
government. I think that this economic theory is the most practical and allows the government
some control over the economy which is needed to help avoid economic crises. This is also
known as demand-side economics as it involves changing the demand to help stabilize the
economy. Fiscal policy in works because of the multiplier effect where a one dollar change in
fiscal policy produces a greater than one dollar change to the national income. It can also come
close to stabilizing the economy almost automatically if out into effect properly and some fiscal
policy actions, such as certain taxes and transfer payments, are considered automatic stabilizers
as they stabilize the growth of the economy. I think that this would greatly help the economy,
however it would be difficult to implement due to the amount of coordination needed within the
government. Then, another economic thought is supply-side economics which tries to increase
supply and therefore increase economic demand. This is used with the Laffer curve to illustrate
that taxes that are too high or low will not generate a sufficient amount of revenue and that the
government must consider their fiscal policy for taxes carefully. Each of these types of fiscal
policies and economic theories have been tested, however I think that more evidence is needed to
suggest that one theory does better than another as other factors can influence the growth of the
economy.
Budget Deficits and the National Debt

Fiscal policies basic tool is the federal budget. However, the federal budget is not easily
changed due to entitlement programs and parts of the mandatory spending which leaves less
money for discretionary spending. The goal is to have a balanced budget where the total
expenditures equal the total revenue, however the federal budget is almost never in balance. It is
usually either in a budget surplus or a budget deficit. I think that the government budget is never
balanced because the economy is constantly changing and it is difficult to make the total revenue
equal the total expenditures. When the government runs a budget deficit it must pay for the extra
spending and tries to do so in two basic ways. First, the government can create new money,
however this can lead to high levels of inflation. Then, the government can also borrow money
using bonds, treasury bills, treasury notes, and treasury bonds. Borrowing money has its
disadvantages as it creates national debt. I think that the government should try and avoid
national debt as it can cause the economy to decline, hurts investments, and the government must
pay interest in the debt or service the debt. I also think that it is easier for the government to fall
into a budget deficit than it is to run a budget surplus.