Fiscal Policy and Stimulus: Crash Course Economics #8

Today, we peer into a world where shadowy government stuges manipulate the levers of fiscal policy from deep in their evil lairs. They pick economic winners, and losers. And control the business cycle, creating recessions and controling inflation to serve … their nefarious purposes. Nah, Fiscal Policy is a completely legitimate tool
used by non-shadowy government officials to correct fluctuations in the economy. [Theme Music] Okay, in previous videos we’ve discussed the business cycle and how the economy goes up and down and up and down and up and down overtime. This line represents the economy’s potential GDP, the maximum sustainable amount that the economy will produce in the long run. But the business cycle shows that the economy isn’t always at its potential. When actual output is below potential, economists call it a recessionary gap. Workers are unemployed and factories are sitting unused Sometimes, actual output can briefly rise above potential. Economists call this an inflationary gap. Unemployment is super low and factories are working over time but it’s not sustainable. Eventually producers will bite up the price of scarce resources and higher cost will lead to more inflation rather than more output. Obviously real life fluctuations aren’t as predictable as the business cycle might suggest, but every modern industrialized economy sees times of boom and bust. You know, you get your empire strikes back and you get you’re phantom menace. So look at the real GDP growth rate in the United States since 1920 see up and down overtime. In the mid 1980s, things flattened out and we had been called the Great Moderation it seemed like the days of deep recessions and high inflation were over. Then came the great recession, as
a result of the 2008 financial crisis. Back to the same old up and down,
up and down of the business cycle. Both recessionary and inflationary
gaps cause serious problems. High unemployment when the economy is bad? That’s bad, like really bad, And not just for the economy — for people. High employment rate have been
linked to higher suicide rates more domestic violence, and social upheaval. High inflation can be just as bad. Rising costs wipe out savings, and have been the root of protests and riots throughout the world. Well, this seems like a fun episode. Stan, what’s with all the doom and gloom? Isn’t there some way to smooth out these fluctuations? I’m gonna answer my own question:
there might be. Many economists argue that policy makers should intervene in the macroeconomy in order to promote full employment or reduce inflation. Today, we are gonna look at one
of the ways to do this: fiscal policy. The idea of fiscal policy is really simple, when the economy is going too slow, or too fast, the government can step on the gas or the brake by changing government spending, or taxes. In the United States, that’s the job of
Congress and the President. When the economy falls into a deep recessionary gap, the government can increase government spending, cut taxes, or do some of both, that’s called expansionary fiscal policy. The idea that government spending creates jobs and increases income for construction workers and teachers and other labours. In turn, theses workers spend more of their additional income, increasing consumer spending and boosting the entire economy. Cutting taxes follows a similar logic. A tax cut will increase disposable income
for consumers that will increase our consumer spending and boost the entire economy. This is exactly what the U.S. did in 2009
during the depths of the Great Recession. The American recovery and reinvestment act was a stimulus build that added more than 8 hundred billion dollars to the economy. That stimulus was spilt 60-40 between new government spending and tax cuts and the expansionary fiscal policy funded new roads and bridges and upgrades to the electric grid, and those projects created jobs. But when the economy has an inflationary gap the government can cut spending, or raise taxes or do some combination of the two. That’s called contractionary fiscal policy,
and that’s not half as fun. The idea is that higher taxes will lead consumer with less money to spend, and lower government spending will mean fewer public
jobs, all that should reduce consumer spending cooling off the economy and reducing inflation. We don’t see contractionary fiscal policy very often in practice because politicians rarely want to hit their
voters with a slower economy, it’s a hard sell and it could cost policy makers their job. U.S. President George H. W. Bush famously stated “Read my lips, no new taxes.” While campaigning in 1988. A few years later, he agreed to raise taxes to reduce the debt and lost the election in 1992. So the big question here is:
Does fiscal policy actually work? Does stimulating the economy with spending and tax cuts actually, you know, make the economy grow? That is the most heated debate in modern economic, and it’s been raging for decades. It’s been known to drive mild-mannered economists to use their loud voices on cable news shows. Let’s learn about it in the Though Bubble. Classical theories assumed that the economy will fix itself in the long run, and that government intervention will, at best, lead to unintended consequences and, at worst, cause massive inflation and debt. These theories dominated policy
decisions during the earliers of the Great Depression, which saw little stimulus. Economists argue that unemployed workers would eventually accept lower wages, since some pay is better than no pay, and resource prices would have eventually fall; since fewer people were using resources. Lower cost would lead to more production, more jobs and poof, the economy is back on track. At the time, many policy makers thought about a sick economy, the way doctors a thousand years ago thought about a sick patient. The thinking was that problems resulted from accumulated imbalance, which could be cured by aggressive purging. In the case of doctors, that meant
bleeding their patients. In the case of a recession, that meant standing back and letting the economy bleed jobs and output until balance was restored. Then entered British economist John Maynard Keynes One of the most influential and controversial economist of the 20th century. Keynes basically invented modern economics, and developed theories and models about spending in production. He’s the one that suggested using expansionary fiscal policy to speed up the economy, Keynes argued that government spending can make-up for a decrease in consumer spending. So even if the economy does self-correct in
the long run, there’s no reason to wait it out His justification: “In the long run we are all dead.” Well, Keynes died in 1946, but his theories live on,
and so does the debate. Thanks Thought Bubble. So at first glance, Keynesian policy seem like the
perfect solution to fix a sluggish economy. If consumer spending falls, the government
can spend instead. What’s the harm in that? Well, the government needs to pay for all that spending. They can’t just raise tax to cover because that would cause the decrease in consumer spending and defeat the purpose. So to stimulate the economy, the
government needs the deficit spend; they need to spend more money than
they collect in tax revenue. Now to achieve this, the government needs
to borrow money, which will result in debt, and we are going to make a video about the national debt and different schools of economic thought. But for now, it’s fair enough to say that the people who don’t like Keynesian policy, don’t like it because it causes debt. More technical argument against deficit spending is that it leads to something called CROWDING OUT. If the government borrows a lot of money
that increases interest rates, making it harder for business to borrow money and buy things like factories and tools. This weakens the economy while
increases government debt. But Keynesian economists maintain that crowding out is only a problem if the economy is operating at full capacity, where all workers are employed and we’re producing as much as we can. In that case, since total output can’t really rise, more government spending will result in less private spending. However, they argue that the situation is different when the economy is below capacity with lots of unemployed workers and vacant factories. Now in that case, more government spending can raise overall output by putting idle resources back to work. In fact, Keynesians will argue that government stimulus when the economy is below capacity can actually raise private spending. All those newly hired workers will start spending more money. So how can we figure out who’s right? We can start by comparing the actual performance of economies that receive stimulus to those that didn’t. As we mentioned, in 2009, the U.S. government launched a huge stimulus program in response to the financial crisis. Despite that, employment and GDP both fell. That sounds like a failure, but the majority of the economists think that the situation would have been far far worse without that stimulus. And while the U.S. was implementing stimulus, most European countries were doing the opposite — they were pursuing a policy called AUSTERITY, raising taxes and cutting government spending to reduce debt. Since 2011, when the U.S. and European policies really started to diverge, the U.S. economy has grown at an average rate of 2.5 percent, while the Euro-zone GDP actually shrank by one percent. U.S. unemployment fell to 5.5 percent, while Euro-zone unemployment rose to 12 percent. Another thing to keep in mind is that stimulus
is complicated and it’s hard to do well. One reason is because of this thing
called the MULTIPLIER EFFECT. The idea here is that the government spends 100 dollars and the highway construction worker who got the money will save 50 and then spend 50 in a concert or something. And the musician who got that money will save 25 dollars and spend the other 25 and so on. So because of this ripple effect, the initial increase in government spending of $100 might turn out to be $175 worth of actual spending in the economy. Economists would call this a multiplier of 1.75. But the question is, what’s the real multiplier
of the United States’ economy? Economists have come up with a wide range of estimates for that multiplier, and it turns out that it depends on different situations. When the economy’s
already booming, the multiplier seems to be close to 1. If everyone is already working and the government wants to build a road, then they’re gonna have to hire workers away from the private sector. Sure public sector output increases, but private sector output falls and GDP is unchanged, it’s a wash. But when the economy’s in recession with lots of unemployed workers and lot of unused capital, the multiplier is around 2. Due to that ripple effect, an increase of 100 dollars of government spending, would lead to about 200 dollars of total spending,
which put some people back to work. Moreover, different policies have different multipliers. Spending on welfare and unemployment seem to give us the biggest bang for our buck, since people who have low incomes would likely to spend virtually all of their additional income. Spending on infrastructure, and aid to state & local governments, also seems to have a fairly high multiplier, about 1.5. But general cuts to payroll and income taxes seem to have a multipler of about 1: if the government cuts $100 in taxes, the economy’s going to grow by about $100. More targeted tax cuts and tax credits have lower multipliers, since they tend to benefit those who have higher incomes who often save rather than spend additional income. But what we want is something that will affect the economy rapidly, but also have a high multiplier. So tax cuts put money in people’s hands quickly, but that money might get saved rather than spent. On the other hand, infrastructure projects like making roads and bridges have strong multipliers, but it may take months or even years to complete. So fiscal stimulus maybe an important tool,
at least when it comes to a recession, but it doesn’t mean that it’s easy to do
or that all stimulus is created equal. So fiscal policy has its advantages and drawbacks but in the end, maybe it’s all about that thing you didn’t have when you were in 6th grade — Confidence. When people are miserable and unemployed,
they want to feel like help is on the way. Doing nothing doesn’t create the kind of confidence that will get consumers and businesses spending again, and it doesn’t get politicians reelected. So it looks like Keyne’s policies are here to stay unless… Crash Course Economics is made with the help of all of these nice people. You can help make Crash Course free for everyone,
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100 thoughts on “Fiscal Policy and Stimulus: Crash Course Economics #8

  1. unless they instated a socialist drug state that uses this policies to starve the country's people under the protection of CHINA, Russia and some of the worst dictators in the Arabs countries…
    So yes maybe is a tool that can correct a country's economy but in the hands of conspirators and foreign interests like the Cuban regime that takes of resources for free, is just Evil lair mother…ers causing death and famine…

  2. But then with all of these ups and downs of unemployment, you've got people who are trying to find a job but can't. Do you let them become homeless? NO, that's where welfare is important – it's how you balance out the free market when things are out of control. Personally, I believe everyone, even if they aren't actively seeking work, deserves a basic standard of living through welfare payments. And then you've got to consider the fact that in the future robots will take most of our jobs. And then you have the problem where if 50% of our jobs will be taken and 50% will be on welfare, then why does anyone have to work at all? We can't fill all the jobs with robots (just yet) but we also don't want people to think it's unfair if some have to work and others don't.

  3. These guys were lying about the first part of the video. There are people who are the private sector of the economy,who own huge portions of bank stocks.
    And these banks own portions of the federal reserve bank. Yeah,you may say that the "Fed" is owned by the GOP but its owned by central bankers.
    These control the rate at which money is printed, which unconstitutional, its actually the GOP'S "TREASURY'S" job.
    I wish people would know the truth that these organization's exist and that they are owned by powerful families.

  4. "Maybe it's about that thing you didn't have in sixth grade: confidence ."

    Gurl, please. It's been years since then, and I STILL don't have that!

  5. to all of you who say they talk too fast in their videos…watch it again and again and again and again until it finally seeps in through that thick molasses brain of yours

  6. I still think the Classical system, letting the economy run itself, is the better system. Private citizens will always try to manage their money in the best way, the government however doesn't care if it's productive or not; it's not theirs to lose. Plus it seems to me that when you give the power to indebt(A.K.A. enslave) to politicians, it doesn't go well.

    P.S. I think the parallel of Classical economics and a doctor bleeding patients is incorrect and derogatory. It would be more comparable to letting the patient's body heal itself, with no doctor involved.

  7. And now the Euro zone is back on its feet while the United states are nose deep in debt and have an Orange bufoon for a president

  8. Why was fiscal policy bad? Milton friedman and his buddies didn't get a lot of things right… Even Monetarist views of exchange rates were discredited. And still, a lot of people believe him.

  9. You could have talked about Friedrich Hayek while mentioning Classical theory and how the US economy boomed by 1950 following his theory.

  10. I think that the stimili has a different effect when government just PRINTS money, not really from trade and production in the economy, so the economy always have artificial inflation

  11. "Peer into a world where shadowy government stooges manipulate the levers of fiscal policy from deep within their evil lairs"

    Nightvale, is that you?

  12. This channel has a very progressive liberal bias. This video was a shout out to Keynesian economics and it compares Austrian economics to out dated medical practices.

  13. Why would poor people be more likely to spend and wealthy people be more likely to save? Wouldnt it be the other way around?

  14. Fiscal policy like presented here is economic mythology (I'm not saying it is wrong, where each nation's mythos makes the laws, but there are a lot of interpreted variables for any viewpoint); you can look at indicators after an event, you can change your stories as they happen, and you can teach how this happens, but nobody is sure. The problem with storytelling is that it is still a story, even if it is based upon belief. My concern is the national debt that comes with interest, and there is more at stake than spending money, because interest is a deep, deep hole to be in. In addition, the building a new bridge in government spending comes with political strings, where the Federal Government undermines State authority to political control the population through money programs and fancy idealist practices, and this undermines benefits in favor for what is socialism and the authoritarian caregiver state that even regulates religion through the tax codes. There is much more going on here than just stimulating the economy, it is also politically driven and is also about control, driven, national policies.

  15. Recessionary Gap , Inflationary Gap , Macroeconomics , Fiscal Policy , Expansionary Fiscal Policy , Contractionary Fiscal Policy , Deficit Spend , Crowding Out , Austerity , Multiplier Effect .

  16. at 7:05 I was like "I thought u.s. debt went over $10t already, what happens to the clock?"so I googled and, guess what, another digit is added to it.
    that is so sarcastically convenient as how congress raises the debt ceiling

  17. This helped me grasp this concept SO much easier. I was lost and thought I'd fail my essay. I am extremely grateful for this video and the rest of the economics series. Keep up the great work.

  18. this should be teatched in school. I swear i stopped counting the number of morons spouting this "taxation is theft" bullcrap

  19. One thing the Fed ensures is inflation. As soon as you start raising interest rates to combat inflation prices go up. Somebody needs to study the short term impact of increasing interest rates on inflation and what the affect is on the feedback for the control loop regarding inflation and employment. haha Crypto might undo it all.

  20. questions I have for Fiscal Policy:
    let say if the government deficit was applied then does that mean that the citizen have to pay more taxed or where does the money to pay the worker? If so does it creates incentive for business to grow bigger and create more job?( I bet no). Then I do not think Fiscal Policy do any good to the market.
    I know that complete Fiscal Policy is impossible without inflation; inflation in the recession is abundance already, I do not think it is a good Idea

  21. I think Fiscal policy created job that is not sufficient since it does not have any incentive or demand on the job. Create a job is easy, I can tell someone to dig a hole and fill it up, that is a job.

  22. Ya'll are gonna pretend that credit and interest rates aren't a thing? And that 2008 was a typical dip in economic growth?

    Lol k

  23. the rich have everything they could ever want, so they will just save, since saving is the default state, and in absence of purpose, all things go to the default state, given human nature.

  24. Question: how does the government borrow money. And how does gov deficit spending raise interest rates or why?

  25. i am watching your videos for over an hour now, which is literally saving me from failing my macroeconomics test tomorrow morning. you explain that stuff way better than some profs in university as your videos are perfect to understand mathemetically complicated theories! Greets from germany and lots of thanks for all the work 🙂

  26. Ok, genuine questions for anyone who knows a whole bunch about econ:
    Surely the most logical government policy to expand the economy would be to cut taxes for the poor (as they save less and spend more, adding value), increase taxes on the rich (to reduce/manage the deficit, and reduce the amount of money lost into the savings accounts of the wealthy) and increase public spending, so as to increase jobs?

    Everything there seems to make perfect sense… So why have there been so many cuts to taxes for the wealthy in recent history? Surely that damages the economy, as the rich are just saving, and the government is losing its spending power?

    Similarly, why did anyone even consider austerity practices like my country, the UK?

  27. So we're not going to tell you which side to take, but if you believe in the classical theory, you basically believe in bloodletting….

  28. I really panicked when the video started playing since I know nothing about fiscal policy and i'm writing a test about it……. lol you had me good

  29. Comparing classic economics to witch doctors using leeches is all you need to know about how biased this video is

  30. "Fiscal policy is a completely legitimate tool used by non-shadowy government officials to correct fluctuations in the economy."

    Please tell me I'm not the only one who could hear that in Cecil Palmer's voice (a la Welcome to Night Vale).

  31. All I ever hear when being taught economics is crazy claims and no evidence or explanations. Like how would a booming economy lead to inflation? It makes no sense to me.

  32. The problem with stating that "government steps on the gas or the break" on the economy is the fallacy that government is the chief driver of economic activity, rather than firms and individuals. Government, if anything, is an impediment to the economy. This "stimulus spending" to "create employment" is really just diverting diverting employment and cannot happen without first taking capital and killing jobs from somewhere else.

  33. Debt is only one of the problems. Another, possibly worse, problem is that temporary government spending creates bubbles by feeding money into less efficient decorous of the market that won’t be used nearly as much once the private sector is relied upon to choose where money should be spent. When these bubbles pop you get back to unemployment

  34. Keynesianism doesn’t work in a long run. Because government cannot produce profit it’s only can take taxes from people or print more money (or take credits which also irrational because again government cannot produce profit compare to business)

    The best thing you can do as a government it’s decrease your own spendings and allow business what’s they want to do.

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