Unit 15
Government Fiscal Policy
Reading
Ch. 15 "Government Fiscal Policy"
Lecture outline
Fiscal Policy was developed by John Maynard Keynes in The General Theory of Employment, Interest, and Money (1936)
Became known as "Keynesian Economics"
Pronunciation: Keynes rhymes with Canes. Keynesian = Canes-ee-an
Ch. 15 "Government Fiscal Policy"
Lecture outline
Fiscal Policy was developed by John Maynard Keynes in The General Theory of Employment, Interest, and Money (1936)
Became known as "Keynesian Economics"
Pronunciation: Keynes rhymes with Canes. Keynesian = Canes-ee-an
Classical Economics had said that peaks and valleys in the economy will smooth themselves out if left alone to the private sector. Supply and demand would rise and fall, but always return to equilibrium due to market forces. Wages would rise and fall, but would always follow the laws of supply and demand. If demand falls, wages will fall... but then prices will also fall, leading to more demand, leading to more output, and thus leading back to higher wages.
In these ideas, you probably recognize the influence of Adam Smith in The Wealth of Nations (1776).
In these ideas, you probably recognize the influence of Adam Smith in The Wealth of Nations (1776).
- It is the highest impertinence and presumption… in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense... They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.
- There is no art which one government sooner learns of another than that of draining money from the pockets of the people.
Keynesian Economics was a huge departure from this. Keynes said that government should take an active role in managing the economy. In times of economic recession, the government should spend more money to stimulate output and try to keep wages high. In times of economic prosperity, the government should raise tax rates, thus siphoning money out of the economy, thus decreasing demand, thus decreasing output. The money brought in by higher taxes would be "set aside" for a rainy day, so to speak.
Thought questions:
From our 21st century perspective of big, overreaching government sticking its fingers into every aspect of our lives and running up massive amounts of debt, Keynes can seem out-of-touch. In truth, he was an extremely intelligent and well educated person with a wide range of views on many things. In the 1930's, people were living through the Great Depression and trying to figure out government's best role in responding to it. Also keep in mind that people like Keynes (1930's) were trying to combat Marxist-Socialism, which they viewed as extremely dangerous.
Class exercise: Analyze and compare the following quotations from Keynes (these are not related, they are from different periods of his life)
Thought questions:
- How could a government stimulate output? Discuss...
- Why would raising tax rates decrease demand and output? Discuss...
From our 21st century perspective of big, overreaching government sticking its fingers into every aspect of our lives and running up massive amounts of debt, Keynes can seem out-of-touch. In truth, he was an extremely intelligent and well educated person with a wide range of views on many things. In the 1930's, people were living through the Great Depression and trying to figure out government's best role in responding to it. Also keep in mind that people like Keynes (1930's) were trying to combat Marxist-Socialism, which they viewed as extremely dangerous.
Class exercise: Analyze and compare the following quotations from Keynes (these are not related, they are from different periods of his life)
- Capitalism is "the astonishing belief that the nastiest motives of the nastiest men somehow or other work for the best results in the best of all possible worlds."
- "Communism draws its strength from deeper, more serious sources. Offered to us as a means of improving the economic situation, it is an insult to our intelligence. But offered as a means of making the economic situation worse, that is its subtle, its almost irresistible, attraction. Communism is not a reaction against the failure of the nineteenth century to organize optimal economic output. It is a reaction against its comparative success."
Today, if you say you are "Keynesian", it's a way of saying you favor a big, centralized government.
New-Classical Economics advocates limiting the government's role in the economy (and, by extension, in society). This view has been heavily influenced in the U.S. by economists such as Milton Friedman, Robert Lucas, and Thomas Sowell.
You get the gist of economist Milton Friedman if you look at some of his quotations:
On having a work ethic:
New-Classical Economics advocates limiting the government's role in the economy (and, by extension, in society). This view has been heavily influenced in the U.S. by economists such as Milton Friedman, Robert Lucas, and Thomas Sowell.
You get the gist of economist Milton Friedman if you look at some of his quotations:
- If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand.
- Nothing is so permanent as a temporary government program.
- Underlying most arguments against the free market is a lack of belief in freedom itself.
- Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.
- Governments never learn. Only people learn.
- Concentrated power is not rendered harmless by the good intentions of those who create it.
- Inflation is taxation without legislation.
- The government solution to a problem is usually as bad as the problem.
- There's no such thing as a free lunch.
- I am favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible.
- The main development I want to discuss has already occurred: Keynesian economics is dead [maybe ‘disappeared’ is a better term]. I don’t know exactly when this happened but it is true today and it wasn’t true two years ago. This is a sociological not an economic observation, so the evidence for it is sociological. For example, you cannot find a good, under 40 economist who identifies himself and his work as ‘Keynesian’. Indeed, people even take offense if referred to in this way. At research seminars, people don’t take Keynesian theorizing seriously any more—the audience starts to whisper and giggle to one another. Leading journals aren’t getting Keynesian papers submitted any more.
- I have never understood why it is "greed" to want to keep the money you have earned but not greed to want to take somebody else's money.
- The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.
- Socialism is a wonderful idea. It is only as a reality that it has been disastrous. Among people of every race, color, and creed, all around the world, socialism has led to hunger in countries that used to have surplus food to export.... Nevertheless, for many of those who deal primarily in ideas, socialism remains an attractive idea -- in fact, seductive. Its every failure is explained away as due to the inadequacies of particular leaders.
On having a work ethic:
- Despite a voluminous and often fervent literature on "income distribution," the cold fact is that most income is not distributed: It is earned. - Dr. Sowell
- Those who work their land will have abundant food, but those who chase fantasies have no sense. - Ancient Proverb (Proverbs 12:11)
Taxation
In the U.S., we have a progressive income tax. Look carefully below at the rates.
Class discussion:
In the U.S., we have a progressive income tax. Look carefully below at the rates.
Class discussion:
- Should we have a progressive-style tax system?
- What other options are there?
- Why do we even have a federal income tax? Where does the U.S. Constitution give the federal government the right to take part of your income by using force if necessary? Think about it...you can be arrested and put in prison for not paying tribute to Washington D.C... (this will require some research...)
The National Budget
Taking this class, you should have a general idea of the government's budget (taxing and spending).
- Total U.S. Goverment spending https://www.usgovernmentspending.com/
- Total U.S. Government revenue https://www.usgovernmentrevenue.com/
Homework
| 15._form_1040_income_tax_assignment1.docx |
| tax_package_1040_mr._mrs._taxpayer.pdf |
Tax assignment hint: Their taxable income (line 10 on Form 1040) will be between $65,000-70,000, their tax owed (line 11) will be between $7,000-8,000, and the amount of their refund (line 20a) will be between $3,000-5,000.
| 15._government_fiscal_policy_homework.docx |