Econ 2133 1st Edition Lecture 4 Outline of Last Lecture I Fisher Equation II Indexation END OF PART I Outline of Current Lecture PART II Government Fiscal Policy Role Government plays in America s Macro Economy I Federal Budget II What is Fiscal Policy III Fiscal Policy Process IV Determinants of Consumption Current Lecture A Role of Conventional Wisdom what members of congress journals and American people think B Different points of view that poke holes in conventional wisdom and subjecting it to scrutiny I Federal Budget 3 99 trillion budget for 2015 II What is Fiscal Policy Congress and president using taxation and spending policies to attempt to lower the amplitude and periodicity of economic fluctuations and thereby promote economic stability A History of our government s role in economy Jeffersonian ideals that government should be limited However demonstrated rule of law private property If I own private property you cannot take it from me US Argentina taking any account over 500 000 and replaced with government bonds US Has legal system that enforces contracts defines our society protects property Douglas North identified what makes wealthy countries wealthy and poor countries poor it s our rule of laws that govern us not kings or legitimacy from God People guffawed at people ruling over each other instead of king with divine right ruling over people when US first created as a country of laws So government does has a legitimate role in correcting market externalities Eternal debate will always be just how much government is enough Before great depression focus on limited government but after it changed completely The duty of government to intervene in our economic affairs turned around when FDR took office So now GDP C I G now it s government s duty to intervene Beginning with Full Employment Act of 1946 if private sector is insufficient then it s the government s duty to increase spending to promote full employment and stop economy from falling These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Motivator for government intervention was the great depression Full Employment Act saved US from returning to great depression after WWII Public Spending comes from private sector via taxation B Fiscal policy can be both A Expansionary mash the gas B Contractionary slam on breaks C Example Greece Gone through many years of fiscal austerity stopping of spending and increase of taxes because they were living on borrowed money 2008 came and they couldn t borrow any more money from other countries Had to downsize their government spending Now don t want to pay back all their debt but also want to increase spending again III Fiscal Policy Process A Government Spending 1 Budget Process a President Proposes budget first b Goes to Congress via appropriations bills c Appropriations bills get modified and go back to President of United States POTUS 2 Tax Laws Tax Percentage Rates a All tax legislation starts in House Ways Means Committee 8 are reps 7 are demos Need majority to get legislation out of committee it will just die b Goes to Senate Finance Committee where reps still have majority c Tax legislation is passed in both houses then into law d Sent to POTUS who will veto it 3 GDP C I G IV Determinants of consumption 1 Current income return to labor services and assets Recreation bet Income and C Flow variable so much per unit of time EX 400 000 yr 8 hr 2 Wealth Stock sum totally accumulation over time Flows make stocks go up Net Worth Assets increase when investing in the compound interest state matches what you put in until you retire and stop contributing Assets what you own liabilities what you owe Net Worth Put 10 of your income in stocks because to doubles ever 7 5 years If you take money out before you turn 60 then you not only have to pay an extra 10 on that money but then bumped up to another tax bracket went 600 000 to 160 000 in one day 3 Permanent Income LDFE Cycle hypothesis Milton Freidman and Diglioni declared that current consumption at the time depends on lifetime Dissaving a Borrowing from government etc b Spend Assets that have been given to you