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Fiscal & Monetary Policy
Spring 2013Topic 6
What are they?
Fiscal policy
Government expenditures and taxation
Monetary policy
Management of the money supply
To what end?
“Do no harm”
The “golden rule” of monetary growth
To what end?
“Do no harm”
Make things better
Stabilization
How does fiscal policy work (in theory)?
G and the AD curve
T and the AD curve
Is that all?
The role of multipliers
Types of fiscal stabilizers
Automatic
Discretionary
Implications for the budget
Violating stabilization
Violating stabilization
Violating stabilization
Debt implications
Debt implications
How is that possible?
The debt game
An odd legal limit
Putting in place odd incentives
1980s Social Security reform
How does monetary policy work (in
theory)?Money and the interest rate channel
Normal and quantitative easing
Do either really work?
What are the issues?
Policy lags
Data collection
Data analysis
Policy formulation
Implementation
Impact
What are the issues?
Policy lags
What are the issues?
Policy lags
Fiscal offsets
Savings
Crowding out
What are the issues?
Policy lags
Fiscal offsets
Monetary offset
Velocity
What are the issues?
Policy lags
Fiscal offsets
Monetary offset
Policy that generates its own need
Where does that leave us today?
In debt
Debt to the Penny
Where does that leave us today?
In debt
It isn’t just the government
Where does that leave us today?
In debt
Moving in an unfortunate direction
A bit of ugly math
Current public debt
Paying off the “trust” funds
Annual deficits
$11 trillion becomes $34 trillion by 2030
Likely a worst case scenario
So what should we do?
Nothing now?
Wrong time to fix the problem
Wait for recovery
Does history promise better behavior?
So what should we do?
Nothing ever?
Monetize the debt
Likely inflation?
Rough (VERY) ballpark of 8 percent per year
So what should we do?
Cut spending?
Short-term cost
What to cut?
So what should we do?
Raise taxes?
Short-term cost
Whose taxes?
The current system
Options to get more taxes
Raise rates
The odd promise of the Laffer Curve
Keane and Rogerson, 2012
Labor supply elasticity estimates
Options to get more taxes
Raise rates
A new system
Not revenue neutral
Flat tax?
Code simplification?
