In which Jacob and Adriene teach you about the evils of fiscal policy and stimulus. Well, maybe the policies aren’t evil, but there is an evil lair involved. In this episode we learn how government use taxes and spending influence the economy. Sometimes the government gives, and sometimes it takes. And the giving and the taking can have a profound effect on how economies behave.
Today, we peer into a world where shadowy government stuges manipulate the levers of fiscal policy from deep in their evil lairs. and control the business cycle, creating recessions and controling inflation okay, in previous videos we’ve discussed the business cycle and how the economy goes up and down and up and down and up and down overtime. the maximum sustainable amount
That the economy will produce in the long run. but the business cycle shows that the economy isn’t always at its potential. when actual output is below potential, economists call it a recessionary gap. workers are unemployed and factories are sitting unused sometimes, actual output can briefly rise above potential. unemployment is super low and factories are working over
Time eventually producers will bite up the price of scarce resources and higher cost will lead to more inflation rather than more output. obviously real life fluctuations aren’t as predictable as the business cycle might suggest, but every modern industrialized economy sees times of boom and bust. you know, you get your empire strikes back and you get you’re phantom menace.
So look at the real gdp growth rate in the united states since 1920 it seemed like the days of deep recessions and high inflation were over. back to the same old up and down, up and down of the business cycle. high employment rate have been linked to higher suicide rates and have been the root of protests and riots throughout the world. isn’t there some way to smooth
Out these fluctuations? many economists argue that policy makers should intervene in the macroeconomy in order to promote full employment or reduce inflation. the government can step on the gas or the brake by changing government spending, or taxes. when the economy falls into a deep recessionary gap, the government can increase government spending, cut taxes, or do
Some of both, the idea that government spending creates jobs and increases income for construction workers and teachers and other labours. in turn, theses workers spend more of their additional income, increasing consumer spending and boosting the entire economy. this is exactly what the u.s. did in 2009 the american recovery and reinvestment act was a stimulus build
That added more than 8 hundred billion dollars to the economy. that stimulus was spilt 60-40 between new government spending and tax cuts and the expansionary fiscal policy funded new roads and bridges and upgrades to the electric grid, the government can cut spending, or raise taxes or do some combination of the two. the idea is that higher taxes will lead consumer with
Less money to spend, and lower government spending will mean fewer public we don’t see contractionary fiscal policy very often in practice u.s. president george h. w. bush famously stated “read my lips, no new taxes.” while campaigning in 1988. a few years later, he agreed to raise taxes to reduce the debt and lost the election in 1992. does stimulating the economy with
Spending and tax cuts actually, you know, make the economy grow? that is the most heated debate in modern economic, and it’s been raging for decades. it’s been known to drive mild-mannered economists to use their loud voices on cable news shows. classical theories assumed that the economy will fix itself in the long run, and that government intervention will, at best,
Lead to unintended consequences and, at worst, cause massive inflation and debt. economists argue that unemployed workers would eventually accept lower wages, and resource prices would have eventually fall; since fewer people were using resources. lower cost would lead to more production, more jobs and poof, the economy is back on track. at the time, many policy makers
Thought about a sick economy, the way doctors a thousand years ago thought about a sick patient. the thinking was that problems resulted from accumulated imbalance, in the case of a recession, that meant standing back and letting the economy bleed jobs and output until balance was restored. one of the most influential and controversial economist of the 20th century.
Keynes basically invented modern economics, and developed theories and models about spending in production. he’s the one that suggested using expansionary fiscal policy to speed up the economy, keynes argued that government spending can make-up for a decrease in consumer spending. well, keynes died in 1946, but his theories live on, so at first glance, keynesian policy
Seem like the if consumer spending falls, the government well, the government needs to pay for all that spending. they can’t just raise tax to cover because that would cause the decrease in consumer spending and defeat the purpose. they need to spend more money than they collect in tax revenue. and we are going to make a video about the national debt and different schools
Of economic thought. but for now, it’s fair enough to say that the people who don’t like keynesian policy, don’t like it because it causes debt. more technical argument against deficit spending is that it leads to something called crowding out. making it harder for business to borrow money and buy things like factories and tools. but keynesian economists maintain that
Crowding out is only a problem if the economy is operating at full capacity, where all workers are employed and we’re producing as much as we can. in that case, since total output can’t really rise, more government spending will result in less private spending. however, they argue that the situation is different when the economy is below capacity with lots of unemployed
Workers and vacant factories. now in that case, more government spending can raise overall output by putting idle resources back to work. in fact, keynesians will argue that government stimulus when the economy is below capacity all those newly hired workers will start spending more money. we can start by comparing the actual performance of economies that receive stimulus
To those that didn’t. as we mentioned, in 2009, the u.s. government launched a huge stimulus program in response to the financial crisis. despite that, employment and gdp both fell. that sounds like a failure, but the majority of the economists think that the situation would have been far far worse without that stimulus. and while the u.s. was implementing stimulus, most
European countries were doing the opposite — they were pursuing a policy called austerity, raising taxes and cutting government spending to reduce debt. since 2011, when the u.s. and european policies really started to diverge, the u.s. economy has grown at an average rate of 2.5 percent, while the euro-zone gdp actually shrank by one percent. one reason is because of
This thing called the multiplier effect. the idea here is that the government spends 100 dollars and the highway construction worker who got the money will save 50 and then spend 50 in a concert or something. and the musician who got that money will so because of this ripple effect, the initial increase in government spending of $100 might turn out to be $175 worth of actual
Spending in the economy. economists have come up with a wide range of estimates for that multiplier, and it turns out that it depends on different situations. when the economy’s already booming, the multiplier seems to be close to 1. if everyone is already working and the government wants to build a road, then they’re gonna have to hire workers away from the private sector.
Sure public sector output increases, but private sector output falls and gdp is unchanged, it’s a wash. but when the economy’s in recession with lots of unemployed workers and lot of unused capital, due to that ripple effect, an increase of 100 dollars of government spending, moreover, different policies have different multipliers. spending on welfare and unemployment
Seem to give us the biggest bang for our buck, since people who have low incomes would likely to spend virtually all of their additional income. spending on infrastructure, and aid to state & local governments, also seems to have a fairly high multiplier, cuts $100 in taxes, the economy’s going to grow by about $100. more targeted tax cuts and tax credits have lower
Multipliers, since they tend to benefit those who have higher incomes who often save rather than spend additional income. but what we want is something that will affect the economy rapidly, but also have a high multiplier. on the other hand, infrastructure projects like making roads and bridges have strong multipliers, but it doesn’t mean that it’s easy to do or that all
Stimulus is created equal. but in the end, maybe it’s all about that thing you didn’t have when you were in 6th grade — confidence. doing nothing doesn’t create the kind of confidence that will get consumers and businesses spending again, crash course economics is made with the help of all of these nice people. patreon is a voluntary subscribtion service that
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Fiscal Policy and Stimulus: Crash Course Economics #8 By CrashCourse