Gayblack Canadian Man

Foreign Policy Analysis
The Limits of Fiscal Policy

The Limits of Fiscal Policy

♪ [music] ♪ – [Alex] The best case
for fiscal policy is during a recession caused
by an aggregate demand shock. But even with
this best-case scenario, it’s still difficult
to effect change. An ideal stimulus is timely,
targeted, and temporary. What do we mean? Well, an ideal stimulus would quickly hire
unemployed workers, putting them to work on projects, which were completed
as the economy recovers. This is ideal because an unemployed worker
has a low opportunity cost — so that’s the best time to hire. If instead, the government
hires a worker who would have had a job anyway, the cost to society is much greater. Let’s look at each
of these problems in more detail. First — timing. New government expenditures
can take years to move from dream to reality. First, there’s the recognition lag. It takes time to identify
a problem, such as a recession. Then, there’s a legislative lag. Both houses of Congress
and the President must approve
any government expenditures — think committee meetings,
debates, drafts, complicated language,
more debates, budget cycles. This lag alone could take
months or even years. And once government expenditure
has cleared Washington, we’ve only just begun! We haven’t even implemented
the project yet. This can involve further hurdles
at the state and local level, such as selecting a firm and writing a contract
to perform the work. It’d be nice if there were
a lot of shovel-ready projects, but the reality is that
every project requires planning, permitting, environmental review,
and other delays. And then, there’s
an effectiveness lag. It takes time
for government spending to ripple through the economy. Wages, for example —
they aren’t paid upfront on day one, but only over time. And then it takes time
for the wages to be spent, and so forth. By the time
that government spending is working its way
through the economy, the situation
may well have changed. One way to minimize lag time is to focus
on automatic stabilizers — fiscal policy
that occurs automatically, without legislation. For example, if the economy
is doing poorly, income, capital gains,
and corporate profits fall. Our progressive tax code
could even mean lower tax rates
during tough times. And that’s good because lower taxes
will result in more spending. Welfare and unemployment insurance
also automatically kick in when individuals
are hurting financially. So these payments, they’re also timely and targeted — targeted not only on the population that needs the funds the most, but on the population
that is most likely to spend the money quickly, boosting the rest of the economy. Most economists, therefore,
favor automatic stabilizers. Now, let’s turn to targeting. Ideally, we would want
to hire unemployed workers, but that isn’t always possible. The very term “shovel-ready”
suggests construction workers And in the last recession,
lots of construction workers did lose their jobs,
but so did retail workers. And the government simply
doesn’t have a lot of ways to hire waiters and store clerks —
at least not directly. Even among construction workers,
there are big differences. A roofer, for example, who had been working
home construction — they might not have
the right skills to easily switch over
to road construction. As a result, when the government
spends money on a new construction project, that may mean hiring workers
away from other jobs rather than hiring
unemployed workers. Now eventually, labor demand
has still increased, but the less targeted the stimulus, the less timely
and effective the stimulus. Finally — magnitude. Spending money —
it’s actually harder than you think. In 2015, US GDP was
roughly $18 trillion. And federal spending?
It was over $3 trillion. But there isn’t that much
discretion in the budget. Non-negotiables —
things like Social Security, Medicare, national defense,
and interest on the debt — they account for 65% of the budget. Authentic discretionary spending
is less than 20%. And even that portion
of the budget is not really all up for grabs. The 2009 stimulus, the US’ largest stimulus
since World War II, — it was roughly $900 billion spread over three to four years. Even at its peak, the stimulus was only
about 2% of annual GDP — not bad, but not that large either. So even assuming
that everything else goes right in theory and practice, it may be difficult to spend enough to fully offset
an aggregate demand shock. That doesn’t mean
it isn’t worth doing. Most studies
of the 2009 stimulus find that it probably did increase GDP
and reduce unemployment. In a way, this was an ideal case
for fiscal policy precisely because targeting
and timeliness are less important when the recession is very severe
and lasts a long time. Let’s summarize. An ideal stimulus is timely,
targeted, and temporary. But none of this is easy. In a severe recession, stimulus may be extremely valuable. But as with monetary policy, it’s a lot more difficult than just
shifting lines on a graph. – [Narrator] You’re on your way
to mastering economics. Make sure this video sticks
by taking a few practice questions. Or, if you’re ready
for more macroeconomics, click for the next video. Still here? Check out Marginal Revolution
University’s other popular videos. ♪ [music] ♪

6 comments on “The Limits of Fiscal Policy

  1. seems so inefficient. instead, every us citizen should be told to just borrow from the stimulus when they want to on whatever they want to. obviously have stipulations where if the citizen's public debt exceeds a certain percentage of their income and wealth then they are forced to work off that debt in prison potentially. the citizen will make all the initiatives and decisions himself as long as he borrows legal amount within prescribed parameters. if he fails his interest payments, same thing. this solves the timeliness and targeted since the citizen is one degree of separation away from everything. The only thing though is that it may not be temporary since as long as the citizen is paying off his debt interest, borrowing more, earning more thanks to the investment, etc it could be a perpetual thing lol you can just incentivize the citizen to pay off all the debt by only giving voting privileges to debt free citizens? or just mandate that if the citizen passes away in debt, then his debt as passed on to his children and spouse. this means the citizen will want to pay off his debt before the likelihood of death.

Leave a Reply

Your email address will not be published. Required fields are marked *