Explorations in Economics Alan B. Krueger & David A. Anderson
Chapter 15: Fiscal Policy • Module 44: Government Revenue and Spending • Module 45: Deficits and the National Debt • Module 46: Managing the Business Cycle
MODULE 44:GOVERNMENT REVENUE AND SPENDING OBJECTIVES: • To specify how the federal government spends its revenue. • To explain the difference between mandatory and discretionary spending. • Learn why it is hard to cut spending.
THE FEDERAL BUDGET The federal budget is a plan for how the federal government will spend money over the coming fiscal year. The fiscal year for the federal government is the period over which the federal budget applies. It begins on October 1 and ends on September 30.
A perspective on government spending Perspective on U.S. Government Spending • Take notes on the areas of government spending and the respective amounts. • You will be creating a bar chart showing each category and amount. Chapter 15-Mods 44-46
Compare your chart to your original prediction • What is the biggest area of government spending? • What were the surprises? Chapter 15-Mods 44-46
Budget Vocabulary Chapter 15-Mods 44-46
THE FEDERAL BUDGETSPENDING Federal Government Spending, 2012
HOW THE FEDERAL GOVERNMENT SPENDS OUR MONEY Mandatory spending is spending that is required by existing law. Entitlement programs are programs that people are entitled to by law if they meet certain qualifications.
HOW THE FEDERAL GOVERNMENT SPENDS OUR MONEY Transfer payments are payments for which the government receives no goods or services in return.
HOW THE FEDERAL GOVERNMENT SPENDS OUR MONEY These are the specific entitlement programs at the federal level. • Which are age eligible? • Which are means tested? • Which require contribution from the entitled? •Which allow the states to set the eligibility requirements?
HOW THE FEDERAL GOVERNMENT SPENDS OUR MONEY Discretionary spending is government spending that is not required by law; rather, it is authorized annually by Congress and the president.
The budget game • Roles – four congressmen in budget negotiation • Objective – get increase in your favorite programs • Favorites – A-F, G-M, N-S, TZ • Turn in one sheet with your final agreement. Chapter 15-Mods 44-46
Summary • Where does government spend most of its money? • Mandatory entitlement programs. • Social Security, Medicare, Medicaid. • Why is spending hard to control? • 2/3’s of spending is mandated by law • Interest groups lobby for their favorite programs Chapter 15-Mods 44-46
History of U.S. Debt History of U.S. Spending Chapter 15-Mods 44-46
MODULE 45 :TAXES AND DEFICITS OBJECTIVES: • Understand government revenues. • To identify the difference between an annual deficit and the national debt. • To analyze the effects of the national debt on individuals and firms.
Where does Federal government revenue come from? • Download Exercise – Debt and Taxes • Save in Fiscal Policy Folder as “Exercise - Debt and Taxes Your Name” Chapter 15-Mods 44-46
Sources of Government Revenue With your partner, work on Part 1: • Create a bar chart or pie chart in power point showing the types of taxes that fund the U.S. government. • Add a page on the tax rates for major income and social insurance taxes. (see exercise for details) • Save your power point in teacher’s inbox Fiscal Policy Folder as “Taxes – your names” Chapter 15-Mods 44-46
SOURCES OFGOVERNMENT REVENUE • All levels of government raise revenue through taxation. • Individual income taxes • payroll taxes • corporate income taxes • estate taxes • gift taxes • import taxes This is a review from Chapter 10
Do Now Is borrowing good for you? Chapter 15-Mods 44-46
Today’s Objectives • Learn differences between deficit and debt. • Determine if government debt is positive or negative for the economy. Chapter 15-Mods 44-46
Reading • Module 45 Chapter 15-Mods 44-46
When taxes are not enough – deficits and debt. • As you view the Paul Solomon video on deficits, take notes in Part 2 of the exercise. • Key questions: • What is the difference between deficits and debt? • How much was the federal debt when the video was made? • Is the dollar amount of the debt the most important measure? • What are the pros and cons of government deficits and government debt? Chapter 15-Mods 44-46
Is the deficit a positive or negative for the economy? PROS CONS Chapter 15-Mods 44-46
Key concepts – Part 4 Vocabulary • Take notes in Part 4 – Vocabulary Chapter 15-Mods 44-46
DEBT, DEFICITS, AND SURPLUSES A budget deficit or budget surplus is the difference between the amount of government payments and the amount of government revenues in a particular year.
DEBT, DEFICITS, AND SURPLUSES The national debt is the amount of money that the federal government has borrowed over time to fund annual budget deficits and has not yet repaid.
DEBT, DEFICITS, AND SURPLUSES • A balanced budget is a budget designed to equate expected revenues with planned expenditures. Reasons for Annual Deficits • Most are planned to achieve worthwhile payoffs. • As economic performance falters, social services increase and government tries to jump-start the economy with spending and assistance.
DEBT, DEFICITS, AND SURPLUSES The debt to GDP ratio is important in evaluating a nation’ s ability to repay the debt. The debt limit is the highest amount that the national debt can reach, as authorized by Congress.
THE EFFECTS OF THENATIONAL DEBT - PROS Investment for the future Debt financing allows the government to spend more today on healthcare, education, highways and defense. These “investments” today, may bring benefits in the future. We can afford it. So long as debt / GDP remains reasonable, a growing economy can support a large national debt.
THE EFFECTS OF THENATIONAL DEBT - CONS Higher Interest Rates The federal government makes interest payments to US debt owners. As investors buy the government debt, they have less funds for private investment. The crowding- out effect is the constraint on private sector borrowing that results from higher interest rates due to government borrowing.
THE EFFECTS OF THENATIONAL DEBT - CONS The Burden on Future Generations The payment of interest on the national debt is called servicing the debt. As the size of the debt grows, the amount of the interest payments must be increased. The Risk of Financial Crisis If the bond markets lose confidence in our ability to pay interest on the debt, financing can dry up forcing the government to make serious cutbacks. This has already happened in Greece, Spain and Portugal.
Project – Government Spending • Open Project – Government Spending in Teacher’s Outbox. • Save in Teacher’s In-submit – Fiscal Policy Folder • As “Government Spending Project – Your Name” Chapter 15-Mods 44-46
Project – 12 points • Produce a report on a government department or program. • Report should answer list questions: • Size, mandatory vs. discretionary • Services and benefits • Means tested or entitlement • How easy to cut spending in this area? Why? Why not? • Your sources • Due next Thursday 1/23. Chapter 15-Mods 44-46
When debt gets out of control – the Greek experience. The Bankrupt State - Greece - YouTube Chapter 15-Mods 44-46
History of U.S. Debt History of U.S. Spending Chapter 15-Mods 44-46
Do Now – Econ Crossword • # 11 = dividends • # 13 = treasury inflation protected securities • # 1 = intragovernmental debt • # 5 = monetizing the debt Chapter 15-Mods 44-46
Reading & Housekeeping • Module 46 – Fiscal Policy • Government spending projects due next Thursday 1/23. Chapter 15-Mods 44-46
Debt and Taxes • Tax revenue < spending = Deficit • Total U.S. gov’t borrowing = National debt • Pros of debt – “invest” in security, education, health, transportation that have future benefits. • Cons of debt – interest, burden on future generations, crowding out, financial crisis Chapter 15-Mods 44-46
Debt and Taxes • _debt/GDP_______ratiomeasures whether economy can “afford” the debt. • U.S. Debt to GDP now 73%. Greece is 156%. Chapter 15-Mods 44-46
MODULE 46:MANAGING THE BUSINESS CYCLE KEY IDEA: The federal government has several tools that sometimes help smooth out contractions and expansions in the economy. OBJECTIVES: • To explain the difference between contractionary and expansionary fiscal policies. • To convey the difference between discretionary fiscal policies and automatic stabilizers.
LOOKING FOR MACROECONOMIC EQUILIBRIM Fiscal policy is the use of government spending and taxation to pursue economic growth, full employment, and price stability.
Fiscal Policy Government seeks to accelerate (gas pedal) or decelerate (brakes) the economy. Chapter 15-Mods 44-46
Fiscal Policy Reality But because of the economy’s size and delays implementing fiscal changes, it can be more like driving a Mack truck. Chapter 15-Mods 44-46
Your Turn to Drive Partners: Look at the recession and inflation scenarios in 8.1 What should the government do? • Hit the brakes? • Put the pedal to the floor? • How would they do it using tax or spending? Chapter 15-Mods 44-46
Government Response to Economic Problems http://www.reffonomics.com/TRB/chapter24/aggregatedemandsupplygraph1.html Show graphically using Aggregate Supply and Aggregate Demand model. Chapter 15-Mods 44-46
LOOKING FOR MACROECONOMIC EQUILIBRIM Expansionary fiscal policy is any combination of government spending and tax cuts meant to spur the economy. The rightward shift of the AD results in a higher price level but higher RGDP.
LOOKING FOR MACROECONOMIC EQUILIBRIM Contractionary fiscal policy is any combination of government spending cuts and tax increases meant to slow the economy down. The leftward shift of the AD results in a lower price level but lower RGDP.
AUTOMATIC STABILIZERS Automatic stabilizers are changes in taxation and transfer payments that moderate changes in GDP and do not require authorization from the government. • Tax Revenues rise in expansionary periods and fall in recessionary periods • Transfer Payments rise in recessionary period and fall in expansionary periods
THE LIMITS OF FISCAL POLICY Mandatory Spending • Controversial to change the very popular entitlement programs like Social Security and Medicare. Congress must change the law. • Strong lobbying efforts for specific spending like national defense, medical research, environmental protection and others.