A Shift in the American Fiscal Policy

A Shift in the American Fiscal Policy

Introduction

Fiscal policy refers to the government's use of spending and tax policies to influence the economy. When the government increases its spending for defense purposes or raises personal income tax rates, it affects the total level of spending in the economy and, hence, will affect the overall macroeconomic activity of a nation measured by such factors as gross domestic product (GDP), employment, and inflation. This is true for almost any change in spending or taxes. Any change in government spending or taxes will also affect the government's budget deficit. An increase (decrease) in spending or a decrease (increase) in taxes will increase (decrease) the government's budget deficit for a given state of the rest of the economy. Because the government must borrow by selling U.S. Treasury securities to finance its deficits, any increase or decrease in the government's deficit will affect the market for loan able funds and interest rates, which then feeds back on GDP, employment, and inflation.

This paper first discusses the Fiscal Policy and its relevance with the modern theories and technological changes in the current era. The paper gives an overview of fiscal policy of America over the period of the last century, with special emphasis on World War Era. After this, the Federal Government Spending, Automatic Stabilizers and Full-Employment Budget Balance are discussed. Other important issues including Temporary versus Permanent Fiscal Policy Measures, Bias toward Expansionary Fiscal Policy and Tax Sovereignty are also presented in paper. Different effects of fiscal policy including Microeconomic and Macroeconomic Effects and Effects on Public Budget are studied along with the Fiscal Competition. In the end, Implications for the Welfare State are briefly pointed for better understanding of the subject.

Discussion

Fiscal policy concerns the behavior of national governments in raising the money they need to fund the vital aspects of public policy for which they are responsible. Edwin Seligman, who dedicated his scholarly career to the science of finance, first used the term “fiscal policy” to emphasize the need for government to implement some redistribution of income through taxing and spending. Later, John Maynard Keynes and the Keynesians modified the term's meaning to suggest “the manipulation of taxes and public spending to influence aggregate demand.”

The goals of the modern theory of fiscal policy extend beyond stabilization to the idea that fiscal tools can help to redistribute and allocate resources. Nowadays, however, theory and practice are far apart, as fiscal policy is undergoing a serious crisis owing to economic globalization, which is an increasing part of the world's economic activity, now carried out across borders, and imposing further constraints on governments' sovereignty to fulfill an allocative, distributive, regulative, and stabilizing role in their national economic systems. These constraints originate from the incongruence of the dynamic transjurisdictional mobility of production factors and the static institutions of governance based on geographic criteria. National governments therefore have to balance external and internal pressures when formulating fiscal policies and must consider the issues of ...