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Foreign Policy Analysis
Econ Duel: Does Fiscal Policy Work?

Econ Duel: Does Fiscal Policy Work?

♪ [music] ♪ [Tyler] The United States had
a Great Recession not long ago, and during that time, the rate
of unemployment became very high. Around the world recently,
many countries have had downturns or recessions, and again,
high unemployment. So there’s been a big debate
amongst economists recently about fiscal policy. Now, fiscal policy occurs
when a government changes its plans for spending and/or taxing. Does this have the potential
to put more people back to work at relatively low cost? Alex, what’s the case for fiscal policy? [Alex] Well, let’s start with the classic case. Suppose there’s some sort of shock. It could be an oil price increase.
It could be a financial crisis. Maybe it’s even something
like Keynes’ animal spirits. For whatever reason,
suppose that people start to save more and spend less. They get worried.
They’re worried about the future, so, “I can’t spend now.
Now is not a good time to buy.” But when people spend less,
other people’s incomes start to fall and they start
to spend less, and there’s a possibility
of a downward spiral in which everyone’s spending less
and that’s causing other people to spend less
and creating unemployment, causing a lot of problems. If the government can come in
and replace that spending, perhaps temporarily to make
up, bolster that spending for a short period of time,
then maybe they could prevent some of that unemployment
from happening in the first place. Sometimes I worry about the quality
of government decision-making. The federal government will go
to state and local governments, ask for a list of favored projects. The local governments know
these will be paid for. They send along a bunch of ideas
that are half-baked, or not ready, and there’s such a rush
to get the stimulus spending out there, that sometimes I think
we’d be better taking our time, spending our money
in the more effective ways and focusing more on the long-term. Yeah, so there’s a problem
with targeting, and there’s also a problem
with timeliness, and these two are in tension. So when people use these words,
timely and targeted, what do they mean? Let’s start with targeted. Ideally, we’d like the money to employ
people who are unemployed, or to go very close
to where people are unemployed. But if the government
doesn’t have projects which are going to directly
employ those people, then it’s not very targeted. If, instead, we start spending money on,
you know, boosting universities, I’m all for boosting universities, but that’s not going to help
the unemployed very much. And timely,
we’ve got to do this fairly quickly if we want the money to have an effect. And there’s often a trade-off. If it’s timely, that means
we’re doing it more quickly, and it’s harder to figure out
if that’s the project we actually should be doing.
Everything’s in a rush. It might be a project
that doesn’t make sense, or we’re building the wrong road, or it’s bad for the environment
in a harmful way. But again if we wait too long
like you said, by the time it happens,
the recession might be over. So getting the timing right
on fiscal policy can be very difficult. Well, hopefully there are some projects which we would want
the government to do anyway, and maybe it just speeds them up, or maybe it keeps
a list of shovel-ready projects, like improving the transportation system,
the road system, filling in potholes. There are some things we want
the government to do, and if they can do it now
rather than later, then why not? Well, let’s assume that we do need
to replace spending in at least some way. There’s two different ways we could do it. We could cut people’s taxes,
so the private sector could be spending more,
or the government, on its own books, could decide to do more spending
and choose some projects and try to target labor
and to stimulate the economy that way. So a lot of debates
in fiscal policy are about which will be more effective: the tax cut
or the government spending? And what do you think that depends upon? I mean, if you cut the taxes,
the big advantage of that is you leave where and how much
people spend in their own hands. You leave it to the private sector. You let people decide how
they’re going to spend that extra money. If instead you have
the government spend the money, well, if you’re an optimist,
then you think that there’s a whole bunch of government
projects that we need to do anyway. Perhaps we need to fix the roads anyway
because of all these potholes, and if we can do it now
rather than later, then that’s great. If you’re a little bit more
of a pessimist, however, then you’re going to be thinking,
why didn’t we do these projects before? If these projects were so great,
why didn’t we do them in the good times? I noticed in our last burst
of big fiscal policy, one thing our government did
was spend a lot of money to make the economy more green. Well, okay, that makes sense. And another big thing they did was
spend a lot of money to build a lot more roads so we can have
more cars driving around. Well, maybe that makes sense,
but you put the two together and you have to wonder, hmm, where they just in a little
too much of a rush here? Yeah, and here’s another problem. Sometimes the issue
really is the fear factor and what the government needs
to do is just step in temporarily until people calm down a little bit
and the economy recovers. But at other times,
the problem is more fundamental. Sometimes we really do need
to restructure our economy. Some industries need to go away
and some industries need to be born. And if that’s the problem,
then fiscal policy can actually slow things down. Sometimes what happens in a recession is that fiscal policy
becomes confused with industrial policy. And a lot of countries have ended
up slowing down where their economy is eventually going,
by trying to prop up old industries, industries which
are going to die anyway. And if you try and prop them up,
you can have decades of losses before your economy finally restructures. Here’s another one of my worries. The original recipe
behind fiscal policy was that governments would run
sizable surpluses in good times, and then spend down
those surpluses in bad times, and that does make sense. But if you look at what
we’ve actually done, we’re not running surpluses, period. We keep on running deficits
in good and bad times. The total debt gets higher,
and then bad times come along and we’re told we should increase
the debt even more, even more. But eventually,
we’re going to get to the point where they’ll have to pay it back by some mix of spending cuts
and a tax increase. That will be contractionary fiscal policy. We may not be able to
control when that happens. There’s this big negative penalty
out on the end of this story, and we haven’t seen it yet, but that, too, I count
as a cost of fiscal policy. So maybe one compromise here
is what economists call automatic stabilizers,
or rules which we put into place. So for example, when
the unemployment rate goes up, we automatically spend more
on unemployment insurance, and that has two good effects. First of all, we’re helping out
people who need some help. The second good effect is that we’re putting more money
into the economy. We’re allowing those people
to spend more. And if we had more
of these rules put into place, I think there’d be more agreement
on what kinds of fiscal policies would actually be useful. Another kind of rule we might consider
would be cuts in the payroll tax every time the economy’s in a recession.
What do you think of that? I think it’s a great idea.
Singapore actually does that. They do a lot
of advanced things in Singapore. And if we can cut the payroll tax
when the unemployment rate goes up, not only do we put more money
in the economy, but there’s a supply-side effect as well. It increases the incentive
to work and to hire. So I’ll sum up at least some
of the debate this way. In principle, fiscal policy through
more government spending, it can work, but it relies
upon a lot of assumptions about how effective government is,
and people who tend to have an optimistic view of government
tend to favor fiscal policy through more government spending. But a lot of other people
are more pessimistic. And that’s what
a lot of the issue depends upon.[Announcer] What do you think?
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♪ [music] ♪

16 comments on “Econ Duel: Does Fiscal Policy Work?

  1. Great vid! +1 for direct cash transfers like unemployment insurance payments! You can target those hurt by the recession and still leave room for decentralized decision making.

  2. I wonder since you are economist who do you think would be the best for the economy of some of the U.S presidential candidates. Bernie Sanders, Donald Trump, Hillary Clinton, Jill Stein etc.

  3. I'd be interested to hear Tyler and Alex' thoughts on a central bank whose sole objective of monetary policy is inflation stability. This has been the case in New Zealand since 1989 with the central reserve bank adjusting interest rates to achieve a targeted inflation rate of 1%-3% a year. Comments?

  4. Green infrastructure should be our number one goal, we consume so much as a society we are depleting our planet of its resources. When are we going to wake up and smell the dead roses????? Climate change is real people!!!! We can argue over how to manipulate money till we are blue in the face, but if we no longer have a place to live it will not matter.

    We need to invest heavy in things that will cost jobs, but save lives for the future generations like clean energy, and fast/safe/reliable mass transit system(bullet trains, hydroelectric cars, etc).

    The problem I have with capitalism if you make a technology that is more efficient it mean less jobs and less money for more people so we are stuck with a snake that eats it's own tail.

    Let me put it another way, say I am a business that makes a product. I want to make that product for the best possible price for people to buy.To really do this I would want the least amount of cost with the max amount of profit. Well, what are my costs, the products raw materials, energy, transportation, and labor. Where can I cut on these costs. well I can't cut the materials. I can't cut on energy(I can invest but not cut), I can't cut on transportation unless I own my own trucks(again another investment), I can cut on labor as far as how much I am willing to pay which would be whatever is the cheapest cost for the same set of sell level.(Unless I have the money to invest in the previous things).

    The reason companies cut more and more labor is technology(It will replace people with machines it more efficient, and is faster). Does that mean technology is bad???? No it not bad the problem is we are outgrowing our current system (Capitalism) and trying to create a culture of consumerism to save it. We are stuck with how to make jobs in a market that is trying to cut jobs???? What happens is the people with the most money can invest in systems that can automate jobs(This system is also trying to constantly make it more and more automated) and that money goes into the business owners pockets instead of the vast majority of people.

    The real question is how do we transition to a better system without killing our self's with war, and polluting the planet?Consumerism is a cancer not a cure.

    To me that answer is simple: Green infrastructure. We can have the most efficient ways to make food, products, ect, but we need a system that will transport these items to people without polluting our air, water and ozone layer. We need to also invest in clean renewable energy. We have to put our money where our mouths are if we want our children to have a future.

  5. What about the disincentive that unemployment insurance payments induce, causing people to not get another job or to not go to school? Have studies been done on how much longer people remain unemployed because of transfer payments like these?

  6. Sounds like tax cuts are a great idea regardless of the circumstances. But maybe only a recession can persuade a government to actually implement these – politically it's always hard, because all tax money has already been promised to some voters (who now expect certain "free stuff"), and those voters tend to support the current government.

  7. IT'S OKAY TO RUN A DEFICIT. OMG.In fact, it's healthy! We really need to bust this myth that deficits are bad for the economy. Look at Japan! Decades of deep deficits and they are doing just fine. Government is not the same as a household budget.

  8. Monetary policy has had its opportunity and failed. Dramatically. It's way past time to ignite fiscal authorities to rev up the economy. It's suddenly "such a problem" when money has to be directed toward the national interest and not bank bailouts and the MIC. Created currency can't be dominated by the financial sector toward dangerous speculation in lieu of the production side of economy.

  9. In other words U.S is fucked with 20 tn debt. Meanwhile Russia paid all USSR debt and essentially has only 5% debt of its GDP.

  10. This isn't a debate. Just two libertarian economics who seem to agree.
    The issue with tax cuts during a recession is that they have a much smaller multiplier than government spending. In a recession, a rush to liquidity would limit tax cut multiplier. Also, tax cuts tend to be more permanent than government stimulus, which is just a one time burst (see bush tax cuts). Stimulus doesn't have to be in the form of infrastructure either, but expansion in means tested programs targeted towards poorer people who have the greatest propensity to consumer (food stamps) which is shown to have the biggest multiplier. Also, relying on creative destruction to weed out bad industries also relies on assumptions. For instance, banks can go down not because they are insolvent but illiquid. Sometimes it is just a liquidity issue. Also firms can suffer not because of bad company policy or they are in a bad market, but a lack of demand caused by the downturn. We shouldn't have to suffer long term consequences for what are supposed to be short term downturns.

  11. Why not make it permanent? For example a profitable job guarantee program…. It would cut down on unproductive programs like food stamps and unemployment, the money made could allow for lower taxes, it could foster competition, and it would be targeted and timely fixing unemployment all the time.

  12. How is this an economy "duel"? They agree on everything. Government spending to stimulate the economy doesn’t work because the government is inefficient. Government doesn’t make decisions based on business models, it makes decisions based on politics. Government picks winners and losers based on mining votes or putting money into pet projects that are unworkable and would never receive funds on business principles. They will sometimes call these “investments”, but government funding is never an investment, it’s a diversion from real investment, because those funds have to be taken from somewhere. Higher taxes just takes the money from efficient businesses, printing additional money is an unseen tax, as it increases prices and borrowing money creates new debt that has to be paid back with interest, which is a net loss. Government spending, because of its inefficiencies, has been shown to actually slow down the economy rather than stimulate it. That’s why there are recessions at the ends of wars, when government spending is increased greatly. Only the temporary employment of additional workers as warriors and in production of war materials puts the recession off until hostilities end.

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