What Happened to the United States Fiscal Policy?
During the post-World War II period, the United States was facing major fiscal challenges. A rapidly graying population, rising health care costs, and a high-inflation rate made the federal budget deficit likely to increase in the coming decades. Meanwhile, federal debt was rising and interest costs were soaring. According to the Congressional Budget Office, federal debt will reach more than one hundred percent of GDP by 2050 if current laws remain unchanged.
Keynes argued that government should reduce spending during periods of excess demand and raise taxes in order to avoid inflation. But such policies were politically difficult to sell, and the government resisted the change. In the early 1970s, however, a spike in oil prices created an acute dilemma for policy-makers. In a conventional anti-inflation strategy, the government would have cut federal spending, which would have caused unemployment to rise sharply.
Fiscal policy is a complex process that involves the executive and legislative branches of government. The president proposes a budget, which Congress considers. Then, lawmakers divide the overall spending figure into separate categories and pass appropriations bills. These appropriations bills then need to be signed by the president in order to become law.
Fiscal policy is an important element of economic growth, and it is most visible when a country is in a recession. After the Great Depression, the U.S. government began experimenting with fiscal policy to increase economic growth and lower unemployment rates. The government’s policies were influenced by economists like John Maynard Keynes, who argued in The General Theory of Employment, Interest, and Money (1936) that an inadequate demand for goods and services caused joblessness and high prices. The deficit reached $221,000 million in 1986, or about twenty-two percent of federal spending.
The effects of higher inflation on the economy are not yet clear. The Congressional Budget Office’s analysis of the primary deficit shows that the overall impact on the deficit is relatively small. The authors of the book note that higher inflation is not necessarily detrimental to the economy. Higher inflation, however, is a symptom of the greater dangers of recession.
When an economy is in recession, government policies can either increase or decrease the available supply of money in the economy. The government can increase the money supply by increasing spending and reducing taxes. The opposite can also happen when the government reduces government spending or reduces public sector pay. The government can increase spending by implementing expansionary policies and cutting taxes in an attempt to achieve equilibrium.
Fiscal policy is the way governments manipulate the economy to stimulate growth. The government might issue bonds to cover some of its expenses and compete with private borrowers for funds from savings. The government can also raise interest rates and crowd out some private investment. This can lead to a decline in the proportion of private investment in the economy.