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Fiscal policy. Fiscal policy is the governments use of its taxing and spending powers to try and maintain an ideal level of spending or gross domestic product in an economy.
In other words, the government tries to control the level of economic growth by attempting to increase and decrease consumption levels to minimize inflation and unemployment.
The concept of fiscal policy started in 1936 when a British economist named John Maynard Keynes wrote a book titled The General Theory of Employment, Interest, and Money.
In his book, Keynes presented a new economic theory now known as Keynesian economics.
Keynes theorized that the government could minimize the extreme highs and lows of the business cycle by influencing the level of total spending in an economy.
If spending is too high, to try and minimize inflation, the government will try and reduce total spending.
It will do this by reducing its own spending, as well as raising taxes, which leaves less money for consumers to spend.
If spending is too low, to try to minimize unemployment, the government will try and increase total spending.
It will do this by increasing its own spending, as well as lowering taxes, which leaves more money for consumers to spend.
So, at least in theory, fiscal policy can be used to control the total level of spending, and thus the total level of growth, in an economy.
In practice, fiscal policy has had some problems. In times of high spending, high GDP, the government failed to adequately reduce its own spending.
Furthermore, due to political unpopularity, government failed to adequately raise taxes enough to reduce spending, and instead attempted to rely on monetary policy to try and reduce consumer spending.
In other words, it relied on raising interest rates versus raising taxes.
During periods of low spending, low GDP, fiscal policy has had its problems as well. Increased government spending and reduced taxes has led to budget deficits.
A budget deficit is when the amount the government spends in a year exceeds the amount of revenue it makes through taxation and other means.
When the government experiences a budget deficit, it must borrow the money is does not get from revenue. It does this by issuing government bonds.
When someone buys a government bond, they are loaning the government money. There will be more on bonds and notes and T-bills and stuff in a future video. But when the government borrows money to make up for budget deficits, it adds to the national debt.
The national debt hit the one trillion mark in 1981. It took over 200 years for the U.S. to rack up a debt of one trillion dollars.
By 1986, five years later, it was up to two trillion dollars. Over 200 years to rack up the first trillion. Only five years to rack up the second trillion. Three years later, wed racked up another trillion, bringing it up to three trillion.
Two years later, another trillion, bringing it up to four trillion. Notice that the amount of time keeps getting smaller each time we add a trillion dollars.
Any guess what the debt is at now? At the time of recording this, November 3rd, 2009, the national debt is now 11 trillion, 900 billion dollars, which works out to each citizen of the United States share of debt is over $38,750.
Thats a huge amount of money. Each year, a significant portion of our tax money goes to pay the interest on the national debt.
Our government spends more money than almost every other entire country except Japan, Germany, and China.
It is for this reason that most economists recommend that the government balance the budget in some form or another. In other words, the government only spends as much as it makes from taxes and other revenue.
So that concludes the video on fiscal policy. In the next few videos were going to cover monetary policy, banking, and how money is created. See you then.
Music:
Danse Macabre – Low Strings Finale (Theme)
Home base Grove
Griphop
by Kevin MacLeod
incompetech.com
