Fiscal Policy History. Growth of the Federal Government 1930s The New Deal young men worked on infrastructure 1940s WWII everyone worked on war production.

Fiscal PolicyHistory

Growth of the Federal Government 1930s The New Deal

young men worked on infrastructure

1940s WWII everyone worked on war production

1950s industry converted to manufacturing 1970s massive declines, severe corrections 1990s shift to service and technology 2000s recession, housing and financial collapse

Classical Economics Laissez Faire – hands off

(government from the economy) Free markets self correct Natural market forces of AS and AD Business cycle ebs and flows normally Depression was too severe

Did not correct with falling prices How long would correction take

Keynesian Economics Idea

British Economist John Maynard Keynes 1883 – 1946

Theory In a downturn someone should be spending Business won’t with prices falling Consumer won’t because of fear Government can

It could borrow It had an incentive

Make the economy work and win reelection

Practice The Great Depression

FDR The New Deal WWII Funding

Result Government borrowed and spent

Doubles during New Deal Increases 7-fold during WWII

Business invests and consumers gain confidence

Economy grows

Spending

Private sector

+

Government

=

Economic Growth

+

National Obligations

Production Possibility Frontier

False and Fast Prosperity

Dependent on Big Government

Discouraged Entrepreneurship

Both Parties Like to Spend Democrats

Social Welfare Redistribution Environment

Republicans Business Production Defense

Supply Side Economics Taxes hurt economic growth Targeted tax cuts will stimulate growth in

specific areas Tax cuts encourage entrepreneurship Taxes discourage unwanted behavior

Reaganomics Practice

Shrink government Grow business $ trickles down

Result (1980-92) Economy grew Income gap increased

Laffer Curve Measures total taxes collected as a

percentage of the tax rate Lower rates – incentive to make more $

Collect more tax revenues

Higher rates – disincentive to make $ Lose tax revenues

Where is the Laffer Curve?

Effect of Tax Cuts on RevenueTotal TaxRevenue

Tax Rate

0% 100%


Tax Rate

0% 100%CurrentTax Rate

TaxCut


Tax Rate


TaxCut

Increased Revenue

The Effect of Tax Cuts on Revenue

Total TaxRevenue

Tax Rate


TaxCut

Decreased Revenue

The Effect of Tax Cuts on Revenue

Total TaxRevenue

Tax Rate


TaxCut

Politics Both Parties believe in Keynesian

Argue over what to spend the money on

Both Parties believe in Supply Side Argue over who gets the tax breaks

Do these policies really matter? Somewhat

Is there a another way? Monetary Policy

Fiscal Policy History. Growth of the Federal Government 1930s The New Deal young men worked on infrastructure 1940s WWII everyone worked on war production.

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