Fiscal Policy 101

Soon Congress will be back in session and will have to appropriate money for our government to continue to function and that is why this simple and straightforward primer on fiscal policy is necessary.

A few weeks ago, President Obama offered a cut in corporate taxes as a concession in order to be able to spend money on a job creation program. And in an editorial on Shinzo Abe, the Japanese Prime Minister, the New York Times stated, “Mr. Abe challenged conventional economic wisdom during winter by using deficit spending and easy money to jolt Japan’s inert economy back to life.” Both of these struck me as humorous. In the case of President Obama, increased spending and tax cuts are two tools with the same aim of increasing demand in the economy. And in the case of Japan, expansionary fiscal and monetary policies in times of a slow economy are anything but unconventional. In fact they are quite conventional.

But instead of looking at fiscal policy like we would in a classroom, let’s look at it in terms of jobs – jobs that every elected official claims to hold paramount. The question then is whether expansionary (increased government spending and decreased taxes) or contractionary (decreased government spending and increased taxes) fiscal policy would create more jobs.

If tomorrow Congress decided to cut government spending, what would be the direct result in terms of jobs? Government employees and contractors would either get paid less or lose their jobs.

On the other hand, if Congress decides to fund new projects, such as increased funding for infrastructure or jobs programs, what would happen to jobs? They’d go up of course. More people would be designing and building roads and bridges. More people would be teaching employable skills.

And if you would like to look at this in terms of debt and deficit, consider that as more people start working, tax revenues will increase while spending on automatic stabilizers such as unemployment benefits will decrease. The road to a balanced budget does not include pulling the rug out from under people in the middle of a slow recovery and further slowing the pace of recovery, but instead involves speeding up the recovery itself. Thus it is imperative that Congress enacts expansionary fiscal policy in order to strengthen, and not hobble, the recovery.


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