Government and Fiscal Policy
Read this chapter to learn about how the government's fiscal actions influence aggregate demand. The chapter first introduces the components of the government's budget and then discusses discretionary fiscal policy and automatic stabilizers used to influence the economy. Some lags in the implementation of fiscal policy are identified and the concept of crowding out is introduced. Attempt the "Try It" exercises at the end of the section.
1. Government and the Economy
The National Debt
The national debt is the sum of all past federal deficits, minus any surpluses. Figure 12.6 "The National Debt and the Economy, 1929–2010" shows the national debt as a percentage of GDP. It suggests that, relative to the level of economic activity, the debt is well below the levels reached during World War II. The ratio of debt to GDP rose from 1981 to 1996 and fell in the last years of the 20th century; it began rising again in 2002 and has risen substantially since the recession that began in 2007.
Figure 12.6 The National Debt and the Economy, 1929–2010
The national debt relative to GDP is much smaller today than it was during World War II. The ratio of debt to GDP rose from 1981 to 1996 and fell in the last years of the 20th century; it began rising again in 2002, markedly so in 2009 and 2010.
Judged by international standards, the U.S. national debt relative to its GDP is above average. Figure 12.7 "Debts and Deficits for 32 Nations, 2010" shows national debt as a percentage of GDP for 32 countries in 2010. It also shows deficits or surpluses as a percentage of GDP.
In an intense struggle between the Republican-majority U.S. House of Representatives and the Obama administration and the Democratic-majority U.S. Senate in the summer of 2011 that almost resulted in a government shutdown, the Budget Control Act of 2011 resulted in a $1 trillion deficit reduction for the current fiscal year with additional reductions of $1.2–1.5 trillion scheduled to follow. The one thing that all politicians seem to agree on is that this measure will not be enough to put the U.S. government deficit and debt back onto a sustainable long-term path. The various factions differ on what mix of spending cuts and tax increases should be used to control the deficit and debt over the long term. They also disagree on when these changes should take place, given the still-fragile state of the U.S. economy in 2012.
Figure 12.7 Debts and Deficits for 32 Nations, 2010
The chart shows national debt as a percentage of GDP and deficits or surpluses as a percentage of GDP in 2010. The national debt of the United States relative to its GDP was above average among these nations.