Fiscal Policy History

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 ( ) 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 Revenue Total Tax Revenue Tax Rate 0% 100%

Effect of Tax Cuts on Revenue Total Tax Revenue Tax Rate 0% 100% Current Tax Rate Tax Cut

Effect of Tax Cuts on Revenue Total Tax Revenue Tax Rate 0% 100% Current Tax Rate Tax Cut Increased Revenue

The Effect of Tax Cuts on Revenue Total Tax Revenue Tax Rate 0% 100% Current Tax Rate Tax Cut Decreased Revenue

The Effect of Tax Cuts on Revenue Total Tax Revenue Tax Rate 0% 100% Current Tax Rate Tax Cut

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