Fiscal Policy

Use (and synthesize) what you learned from class as well as from the textbook, the tables shown below, and TWO articles from The Economist to answer the following questions. Please explain your answers fully, using the concepts you’ve learned in class as well as insights from the textbook and the article to support your answers. Please use your own words and don’t copy from the article or the textbook.

 

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The articles from The Economist are:

 

The first is titled “Congress and Covid-19 – America’s backward coronavirus strategy” and appeared in the July 22nd, 2020 issue of the Economist.

 

The second is titled “Government finances-After the disease, the debt” and appeared in the April 23rd, 2020 issue of the Economist.

 

PLEASE submit a document that ONLY contains your answers. Just label them as Answers 1 or 2 or 3 or 4. The SafeAssign reports on Blackboard are not easy to understand when your documents contain text from my questions.

 

1. What would you recommend the federal government do to close our current recessionary output gap? Use the AD-AS model, the class readings on Fiscal Policy, and the descriptive details contained in the July 22nd, 2020 article from the Economist (titled “Congress and Covid-19”) to describe your policy proposals. (150 – 200 words)

 

2. “Even before our current recession, our long-term budget outlook was troubling. With our annual deficits exceeding $1 trillion starting in 2019, and into the foreseeable future, it is essential for the present administration to clearly lay out a realistic plan, showing how they intend to deal with America’s long-term fiscal problems, after they have successfully tackled the current recession. The lack of clarity will adversely impact business confidence and interest rates causing damage to the economy.”

 

Explain the above statement and offer some suggestions on how you would deal with the long-term fiscal problems using the class readings on Fiscal Policy, the data presented in this document (see below) and the April 23rd, 2020 editorial in the Economist, titled “Government finances – After the disease, the debt” (100- 150 words)

 

3. “The crowding-out effect from government borrowing to finance the public debt is reduced when a significant percentage of the government borrowing is used to fund infrastructure projects, scientific research, education and resource management”.

Explain the above statement and indicate whether you agree with it. (100 words)

 

4. If the federal government were required by law to balance its budget, how would such a law impact our response to the current recession? (50 words)

 

See over for data

The data presented here has been retrieved from the following federal government sources:

The OMB (Office of Management and Budget)

The CBO (Congressional Budget Office)

The Federal Reserve of St. Louis

 

Table I*

 

YEAR

 

Federal Receipts as % of GDP

 

Federal Outlays as % of GDP

 

Budget Surplus or Deficit as % of GDP

 

Federal Debt as % of GDP

 

2000

 

20%

 

17.7%

 

+2.3%

 

54%

 

2008

 

17.1%

 

20.2%

 

-3.1%

 

74%

 

2016

 

17.6%

 

20.8%

 

-3.2%

 

105%

 

2019

 

16.3%

 

21%

 

-4.6%

 

107%

(in 2020 this is now 136%)

 

Table 2*

YEAR

 

Mandatory Expenditures as % of Budget

 

Defense Discretionary Expenditures as % of Budget

 

Non-Defense Discretionary Expenditures as % of Budget

 

Interest Payments on the Federal Debt as % of Budget

 

1993

 

48%

 

21%

 

17%

 

14%

 

2018

 

61%

 

15%

 

15%

 

8%

 

2025 (Projected)

 

64%

 

15%

 

11%

 

10%

Some numbers have been rounded.

Average The economic Growth rate for the US economy over the last ten years is just under 2.5%

 

Federal Budget Categories:

· In FY 2019, the federal government spent $4.4 trillion, which amounts to 21% of GDP.

· Only $3.5 trillion was financed by federal revenues and the remaining amount was financed by borrowing.

 

What the $4.4 trillion was spent on (some numbers are approximations):

MANDATORY SPENDING:

23% ($1 trillion) Social Security:

45 million receive retirement benefits, 10 million receive disability benefits.

25% ($1.1 trillion) Medicare, Medicaid, CHIP:

$651 billion on Medicare (61 million beneficiaries)

$400 billion on Medicaid and CHIP (82 million low-income seniors and children)

$56 billion on ACA subsidies (9.6 million beneficiaries)

8% ($361 billion) Safety Net Programs:

Such as food stamps, EITC, housing subsidies. It is estimated that these programs have kept 37 million people above the poverty line and that without these programs, our poverty rate would be around 24% instead of just below 13%.

8% ($375 billion) Interest payment on the National Debt

DISCRETIONARY SPENDING:

16% ($700 billion) National Defense

8% benefits for veterans and federal retirees.

2% Transportation Infrastructure

2% Education

2% Science and Medical Research

Includes scientific research, medical research, space programs, the EPA, Interior dept, National Parks Service, Department of Energy

1% Non-security International including diplomatic efforts (State Department) and foreign aid.

4% All other government functions Including law enforcement (FBI, CIA, DHS), justice system, general government operations

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