Fiscal Policy 101

Here we will look at how the fiscal policy works, how it must be monitored, how its implementation affects different people in an economy, followed by my opinion of it.

What is the Fiscal Policy?
According to Investopedia.com the fiscal policy is the government spending policies that influence macroeconomic conditions. Through fiscal policy, regulators attempt to improve unemployment rates, control inflation, stabilize business cycles and influence interest rates in an effort to control the economy.





How Does the Fiscal Policy Work?
The fiscal policy is based on the theories of British economist John Maynard Keynes (1883–1946). Also known as Keynesian economics, this theory fundamentally states that governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and government spending. This influence curbs inflation (generally considered to be healthy when between 2-3%), increases employment and maintains a healthy value of money. Fiscal policy is very important to the economy. For example, in 2012 many people worried that the fiscal cliff (a simultaneous increase in tax rates and cuts in government spending) was set to occur in January 2013, and would send the U.S. economy back to recession. This problem was avoided by the passing of the American Taxpayer Relief Act on January 1, 2013.





Should the Fiscal Policy be Monitored?
Firstly, you must consider for the objective of fiscal policy, which is to find a balance between changing tax rates and government spending. For example, stimulating a sluggish economy by increasing spending or decreasing taxes runs the risk of causing inflation. This is due to an increase in the amount of money in the economy, followed by an increase in consumer demand, which can result in a decrease in the value of money.


Let's say that an economy has slowed down. Unemployment levels are up, consumer spending is down and businesses are not making steady profits. The government therefore decides to fuel the economy and increase aggregate demand by decreasing taxes, which gives consumers more spending money, while increasing government spending in the form of buying services from the market (such as building roads or schools). By paying for these services, the government then creates jobs and wages that are pumped back into the economy. Meanwhile, overall unemployment levels will decline. The government is now practicing expansionary fiscal policy. Now, with more money in the economy and fewer taxes to pay, consumer demand for goods and services increases. This revives businesses and turns the cycle around from sluggish to active.

However, if there are no brakes on this process, the increase in economic productivity will cross over a fine line and lead to too much money in the market. This surplus decreases the value of money while pushing up prices (because of the increase in demand for consumer products). Hence, inflation will exceed the reasonable level. This is why, fine tuning the economy through fiscal policy alone can be a difficult means to reach economic goals. If not closely monitored, the line between a productive economy and one that is drowning in inflation can easily be lost.

The economy may need a slowdown when inflation is too strong. In this situation, the government can use the contractionary fiscal policy to increase taxes to basically take money out of the economy. Fiscal policy could also order a decrease in government spending and thus decrease the money in circulation. Certainly, the negative effects of such a policy in the long run could be a sluggish economy and high unemployment levels. In hopes of evening out the business cycles, the government may continue to use its fiscal policy to fine-tune spending and tax levels.

Who Does the Fiscal Policy Affect?
Unfortunately, the fiscal policy will not affect everyone in the same manner. Depending on the political goals of the policymakers, a tax cut could affect only the middle class, which is typically the largest economic group. In times of economic downfall and rising taxes, it is this same group that may have to pay more taxes than the upper class.

Correspondingly, when the government decides to adjust its spending, its policy may affect only a specific group of people. A decision to build a new road, for example, will give work and more income to hundreds of construction workers. On the other hand, a decision to spend money on building a new jet benefits only a small, specialized group of experts, which would not do much to increase aggregate employment levels.

What Does it all Boils Down to?
One of the most considerable obstacles facing policymakers is deciding how much the government should be involved in the economy. Undeniably, there have been numerous degrees of government interference over the years. Although, for the most part, it is accepted that a certain degree of government involvement is necessary to sustain a thriving economy, on which the economic well-being of the population is dependent on.

 In My Opinion
I believe that the fiscal policy is effective in democratic countries for the most simplistic reason being that government intervention is an essential component of a growing economy. Say for example a recession would take place, as consumption and investment decline, the government can boost its expenditures to offset them. This is because the government can discretionarily change its level of spending with the main objective being to return the economy to the desirable growth. Overall, despite its few flaws, I believe the fiscal policy works effectively in Canada.


 
 

Expansionary fiscal policy vs. contractionary fiscal policy

By: Marc Mance

 

Last week, we were not able to discuss much due to our 3 classes in the 4 day week but out of what were given through handouts, I have decided to compare expansionary fiscal policy and contractionary fiscal policy. Expansionary fiscal policy involves government attempts to increase aggregate demand and contractionary fiscal policy describes a reduction in the amount of money used by the government or a growth in the amount of money bought in, usually through taxes.

To compare the two types of fiscal policies; we see that the aggregate demand increases in the expansionary policy. According to Keynesian economics, if the economy is producing less than potential output, the government spending can be used to employ idle resources and boost the output. When there is an increase in government spending, it will lead to an increase in aggregate demand which then leads to an increase in the real GDP, resulting in a rise in prices. On the other hand, the government can adopt a contractionary policy and decrease government spending which decreases the aggregate demand and the real GDP, resulting in a decrease in prices.

Effects of expansionary fiscal policy

·         Investment

o   Investment can be affected by increasing the government expenditures to help boost the economy. This type of fiscal policy is used by the government to influence the level of aggregate demand in the economy through price stability and economic growth which promoted further investment into firms.

·         Interest rates

o   While the contractionary fiscal policy pulls the interest rate down, expansionary fiscal policy pushes them up. When output increases, the price level increases as well. As the price level rises, people demand more money to purchase goods and services. Since there is no change in the money supplied, this increased demand for money leads to an increase in the interest rates.

Effects of contractionary fiscal policy

·         Government purchasing

o   Involves a decrease in government spending to assorted agencies which then reduce their purchases which decease the aggregate production, income and the rate of inflation

·         Taxes

o   Involves an increase of the income tax rates which provides the household sector with less disposable income that can be used for consumption expenditures which then reduces aggregate production and employment and leads to further decreases in income.

Example

An economist named Abigail Noble is assisting the International Monetary Fund (IMF) in developing policy recommendations for different economies. She met with finance ministers of newly formed states of Sacramento and Salamia.

Sacramento has an inflation rate of 7% as compared to the average of 3%, unemployment rate of 2% as compared with natural unemployment rate of 4%, budget deficit of 5% and a GDP growth rate of 6% as compared to the average growth rate of 3%. Salamia has 1% inflation, 8% unemployment as compared to average of 4%, budget surplus of 4% and GDP growth rate of 1.5%.

Due to Salamia’s low inflation, high unemployment, a budget surplus and a low growth rate, statistics clearly show that it is facing recessionary pressures which make expansionary fiscal policy very appropriate for this situation. By decreasing taxes and increasing government spending, it will eliminate the budget surplus, increase growth rate, increase inflation and decrease unemployment. On the other hand, Sacramento has high inflation, low unemployment, a budget deficit and a high growth rate shows that it is facing inflationary pressures which make contractionary fiscal policy appropriate for this situation. Increasing taxes and decreasing its government spending will reduce the budget deficit, decrease growth rate, decrease inflation and increase unemployment.

Labor Trends: College Graduates

Hello everyone. Last week, we didn't discuss that many things because of the test, but one thing that caught my attention in the labor trends unit was college graduates having better jobs. Having a college degree leads to higher earnings and more career opportunities. But is it true? This is what I will be talking about in this blog post.

On average, college graduates earn more money, experience less unemployment, and have a wider variety of career options than other workers do. A college degree also makes it easier to enter many of the fastest growing, highest paying occupations. In some occupations, having a degree is the only way to get the job. As a whole, college educated workers earn more money than workers who have less education. In 2003, workers who had a bachelor's degree had median weekly earnings of $900, compared to high school graduates who earned $554 a week, which is a difference of $346 per week, or a 62% increase in median earnings. For workers who had a master's, doctoral, or professional degree, median earnings were even higher.

The chart below show four different groups of people. The light brown line shows people who have received a high school diploma or less, with their annual earnings at around $25,000-$26,000. The gray line shows people who have completed some college without a degree, with their annual earnings at around $30,000-$32,000. The dark brown line shows people who have completed college with an associate degree, with their annual earnings at around $33,000-$36,000. The black line shows people who have completed college with a bachelor's or graduate degree, with their annual earnings at around $47,000-$60,000.

As you can see, there is a huge different in annual earnings between people who have a bachelor's or graduate degree compared to people with lower degrees or none at all. A college education can be costly of course, in terms of both time and money, but in the end the reward is well worth it.

I have this chart  to show the unemployment rates for college graduates compared to other groups. Young workers are those aged 22 to 27 without a bachelor’s degree or higher have an unemployment rate between 8%-16%. All workers are those aged 16 to 65, have an unemployment rate between 5%-10%. Recent college graduates are those aged 22 to 27 with a bachelor's degree or higher have an unemployment rate between 3%-7%. College graduates are those aged 22 to 65 with a bachelors degree or higher, have an unemployment rate of 3%-4%.

From looking at these two charts, it is clear that completing college with a bachelor's degree or higher not only secures a good paying job, but lowers the chance of unemployment for that person. Now, going back to what I said at the start about if it is true that having a college degree leads to higher earnings and more career opportunities, it is in fact true. In my opinion, it is well worth it to go to college and graduate some sort of degree. College can be very costly and time consuming, but the reward is worth it.

Unemployment

Hello classmates, In recent times we have been studying the topic of the labour force and unemployment. This is what I shall be discussing today.....

The labour force consists of those who are at the age of sixteen or older that are currently employed or are looking for work. Even those who are not working but are seeking for work are included in the labour force, which I personally believe to be odd and misleading. If the labour force consisted of those who legally work at a business, paper route or mow lawns. The rates and different types of unemployments could be displayed more accurately. In my opinion those included in the labour force should only be those that are working at the time. Those who are considered out of the labour force are those who do not want a job and those who are discouraged. How can unemployment rates be shown accurately if those who are looking for work are considered in the labour force? it can't , I believe if we knew the real number of people that are not working and are abusing the system. We would not so easily hand over our hard earned cash to the government in taxes.

A Person is considered employed if they are working part or full time hours. A person who is underemployed works part time hours but could or wants to work full time hours. There are many businesses that under employ many of their workers due to no shows, labour costs and also because business owners do not want to have their hands tied behind their backs just incase an employee with many shifts decides he or she does not want to work that week. Underemployment is a very smart business tactic for the owners, but for the workers it is not so enjoyable receiving barely any hours on the schedule.

Canada has an unemployment rate of 7.2% which is not bad, but unemployment among youth has become bigger then it has ever been. This generation is much more educated then the last one, but are struggling to find jobs now more then ever. I personally believe that is due to inexperience in the workplace, high student loan debt and also the amount of people that are seeking to certain professions as a career is becoming crowded.

The labour force survey excludes too many people in my opinion to be accurately showing the general population who is working and who is not, again I believe it is so that the general public keeps quiet and keeps paying their hard earned dollars in taxes to a corrupt government.

The labour force survey excludes residents of the three territories (which are filled with tax payed reserves)
Persons living on indian reserves, inmates and full time members of the armed forces. With the armed forces it is understandable that they could be excluded from the labour force, inmates aswell, but for any other exclusions I believe it is inexcusable and it does not accurately show who is and who is not part of the labour force.

There are a few types of unemployment, which show different reasons as to why people don't have jobs.

There is frictional unemployment which includes those who are searching for jobs or are waiting for a call back from a job. You could say that these types of people are between jobs but are still making an effort to find employment.

There is structural unemployment and this is caused by change in demand for consumer goods in technology. Which could be workers who are no longer needed or are necessary in a procedure to either advancements or demands within a product.

There is Cyclical/demand-deficient which is caused by recession. Which include markets that really go downhill during recession such as the housing market.

Seasonal unemployment is due to changes in the seasons. Nobody needs a landscaping company or a lawn company during the winter months and if you do you probably don't live in Winnipeg.. Natural rate is when the economy is working at its full rate and there is just no room for you, sorry. Please enjoy this video.

https://www.youtube.com/watch?v=If-3zgM3kXc