Should the Congress and president engage in discretionary fiscal policy?
Actually, they should stop taking money from the private sector, where real wealth is created, and stay out of the free market altogether. The market will correct itself. In fact, the free market will correct in spite of the government. Right now they have chosen an expansionary policy, through stimulus using money created by the Fed, expanding the money supply. The consequences will occur when the market corrects and grows. The liquidity (printed debt, printed money with no value) must be taken out in precise amounts, with exact timing. If not enough printed money is taken out of the economy, or not soon enough, the consequence is inflation, a risk of hyperinflation, and forced to raised interest. Which could result in the U.S. unable to pay the interest on the debt, resulting in the dollar collapsing. If too much liquidity is taken out, or too soon, the economy stalls, go back into recession, and risks an even greater deflationary downturn that spirals out of control and collapses the economy altogether.
What are the main functions of a fiscal policy?
The fiscal policy generally has four primary functions.1.AllocationThe first major function of fiscal policy is to determine exactly how funds will be allocated. This is closely related to the issues of taxation and spending, because the allocation of funds depends upon the collection of taxes and the government using that revenue for specific purposes.The national budget determines how funds are allocated. This means that a specific amount of funds is set aside for purposes specifically laid out by the government. This has a direct economic impact on the country.2.DistributionWhereas allocation determines how much will be set aside and for what purpose, the distribution function of fiscal policy is to determine more specifically how those funds will be distributed throughout each segment of the economy.3.StabilizationStabilization is another important function of fiscal policy in that the purpose of budgeting is to provide stable economic growth. Without some restraints on spending, the economic growth of the nation could become unstable, resulting in periods of unrestrained growth and contraction.The cyclical nature of the market means that unrestrained growth cannot continue for an indefinite period. When growth periods end, they are followed by contraction in the form of recessions or prolonged recessions known as depressions. Fiscal policy is designed to anticipate and mitigate the effects of such economic .4.DevelopmentThe fourth major function of fiscal policy is that of development. Development seems to indicate economic growth, and that is, in fact, its overall purpose. However, fiscal policy is far more complicated than determining how much the government will tax citizens one year and then determining how that money will be spent.True economic growth occurs when various projects are financed and carried out using borrowed funds. This stems from the the belief that the private sector cannot grow the economy by itself. Instead, some government input and influence are needed. Borrowing funds for this economic growth is one way in which the government brings about development.
What is a non-discretionary fiscal policy? How does it differ from discretionary fiscal policy?
Non-discretionary fiscal policy, as the word suggests, is not at the discretion of the government. Such policies produce impacts automatically, what is called automatic stabilizers technically. Without specific new legislation, increase (decrease) budget deficits during times of recessions (booms). They enact counter-cyclical policy without the lags associated with legislative policy changes. For example, progressive taxation push people into higher income tax brackets during boom times, substantially increasing their tax bill and reducing government budget deficits (or increasing government surpluses). During recessions, many individuals fall into lower tax brackets or have no income tax liability. This increases the size of the government budget deficit (or reduces the surplus).On the other hand, discretionary fiscal policy signifies the deliberate changes of taxes and spending by the government to stabilize the economy through aggregate demand by achieving full employment, control inflation, and economic growth. For example, in the early 1980s, U.S. government introduced a 25% reduction in personal income tax without changing government spending. This policy led to the expansion of aggregate demand to get the economy out of the recession of the early 1980s, and to increase output and employment.However, there is a difficulty with discretionary fiscal policy: Timing. There is usually a lag between the time fiscal policy changes are needed and the instance that the need to act is widely recognized. There can also be a substantial amount of time between the time of recognition and the time that fiscal policy changes are actually enacted. For example, an expansionary fiscal policy may be enacted when the economy is already recovering from a recession. Poorly timed fiscal policy could actually increase inflation and accelerate declines in the economy when the economy has already started to slow down.References: Chapter 13: Fiscal Policy
What is fiscal policy?
Monetary policy is enacted by a country’s central bank. It’s apolitical.Fiscal policy is enacted by the government. The objective of fiscal policy is to either expand or contract AD (aggregate demand) through changes in tax rates and/or government spending. Government spending is one of the four determinants of AD, the other three being consumption, investment, and net exports. That’s why fiscal policies (and monetary policies) are examples of demand-side policies (Keynesian economics).Fiscal policy does not result in changes in the money supply; that, along with interest rates, is the central bank’s responsibility. Fiscal policy is primarily used to combat the effects of inflation and deflation.Expansionary fiscal policy is when the government decreases taxes and/or increases spending. This shifts the AD curve rightwards, closing a deflationary gap:Contractionary fiscal policy is when the government increases taxes and/or decreases spending. This shifts the AD curve leftwards, closing an inflationary gap:For a more detailed explanation of the benefits and drawbacks of fiscal policy, see my answers toShruthi Sailesh's answer to What would be the outcome of using expansionary policies to combat a recession?andShruthi Sailesh's answer to Why does crowding out occur? Can't the government just print new money?Tldr: Fiscal policies change the level of aggregate demand in a nation’s economy.
Is combating secular stagnation with expansionary fiscal policy the wrong approach?
I'm not convinced what we're calling "secular stagnation" right now isn't still the aftereffects of debt overhang from the 2008 recession and downturn in a global credit cycle combined with regulatory driven supply-side factors. Summers (perhaps the biggest proponent of this idea) is a brilliant economist, but he's not the only brilliant economist with ideas about what is going on in the economy today.Having said that I'm skeptical of the premise, I'll answer as though I'm not.No. As the world has become more interconnected in terms of trade and capital markets, fiscal stimulus will become less effective in stimulating domestic income. In open economy macro models with capital mobility and a large share of imports, an increase in government spending will: Appreciate the currency, negating some of the stimulative effect of the spending through an erosion of a country's terms of tradeLead to an increase in imports, exporting domestically stimulated demand across borders through trade flowsWhat this means is that the Keynesian multipliers we would expect from stimulus spending in a modern, interconnected economy will be much smaller than in a closed economy model that looks more like the world did 50 years ago. Considering this, I'm skeptical fiscal stimulus in the traditional sense (I feel differently about things like recapitalizing banks) offers benefits justifying the long run growth costs from the associated debt increase.I do see a contractionary bias in the international financial system that may be partially responsible for low growth and a slow recovery, but this is more related to the international financial system having no way to force surplus (in the balance of payments) countries into increasing domestic demand to eliminate imbalances, rather than forcing deficit countries into contractionary policy. Different situation from secular stagnation and stimulus policy, however.
Macroeconomics Fiscal Policy?
Automatic fiscal stabilizers: A. Are associated with supply-side fiscal policies, but not demand-side fiscal policies. B. Are generally thought to be more powerful that the discretionary fiscal policy tools. C. Are equally advantageous to the economy when the economy is experiencing a recessionary gap and when the economy is in equilibrium at the full employment GDP level. D. Reduce the value of the multipliers associated with the discretionary fiscal policy tools. True or False: If the economy is experiencing cost push inflation due to rising energy costs, supply side economists would argue that appropriate government policies should be introduced to shift the aggregate supply schedule upward and to the left. Supply-side fiscal policies are designed to increase work incentives (of the labor force) and the incentives of entrepreneurs to accept additional risks. Traditional fiscal policy affects the aggregate demand schedule and is intended to affect total spending (expenditures). Which of the following is an example of a supply-side fiscal policy? A. All of the other selections B. An increase in income tax rates paid by households. C. A decrease in the tax rate on corporate profits. D. An increase in transfer payments E. An increase in unemployment compensation Which of the following statements about automatic fiscal stabilizers (the "nondiscretionary" parts of fiscal policy) is correct? A. The automatic fiscal stabilizers tend to be more powerful in changing the equilibrium GDP than are the tools of discretionary fiscal policy. B. These aspects of fiscal policy require current legislation or action by the government to become effective. C. They tend to reduce the value of the discretionary fiscal policy tools. D. These policies tend to cause smaller deficits or larger surpluses as the economy moves into recession. Discretionary fiscal policies which create large budget deficits will have the greatest impact on the aggregate demand schedule if: A. The aggregate supply schedule is upward-sloping but not vertical. B. The aggregate supply schedule is horizontal up to the point of full employment. C. The aggregate supply schedule is vertical throughout its length and is drawn at the full employment level of real GDP. D. The automatic fiscal stabilizers are very powerful.
What is the meaning of a "counter cyclical fiscal policy"?
It refers to government spending policy that levies high taxes and engages in little spending during financially prosperous times, and cuts taxes and raises spending in difficult times. The idea is that the government stimulus of the economy and reduced taxation will boost aggregate demand and thus stimulate the economy but drive the government to deficit. This deficit can be erased as the economy improves and government revenue increases naturally as a result of a more prosperous economy and as a result of higher taxation rates. Counter-cyclical fiscal policy is a Keynesian economic idea and will not be found outside his school of economics. Neoclassical economists will argue that the government can do nothing to improve the economy except lower taxes, and thus will have no need for costly spending programs. To them, the cycles of the economy are irrelevant to government policy because the economy will always recover on its own, and deficit spending should always be forbidden. To “supply side” economists, deficit spending and government intervention in the economy is okay, but raising taxes is never necessary because as tax rates lower, government revenue will always increase because of math. This view has been largely debunked.