April 16, 2009 - Discretionary Fiscal Policy

Did you do it? Did you get it done? Of course I am talking about your taxes, yesterday was the deadline. Or, did you buy tea bags to protest taxes? That is right, yesterday, April 15, "Tax Day" became the day to protest increased government spending of the new presidential administration. As a history teacher, I definitely appreciate the symbolic "tea party" held yesterday in rememberence of the Boston Tea Party to protest the British tax on tea. (Actually, it wasn't so much that a new tax was imposed on tea, instead it was lack of tax on the tea sold directly by the British East India company that made their tea cheaper than that sold by the retailers in the colonies.) From the historic Boston Tea Party the slogan, "No taxation without Representation" really began to take hold. Unfortunately, no such memorable slogan will emerge from yesterday's protest. The only thing I recgonize from the protest is the ignorance of the protestors and the short memory they have of government spending.

A little research* will show that despite the size of government spending proposed (or due to be proposed) by the Obama administration, the Bush administration budget for Fiscal Year 2009 (FY09) is greater and contributed more to the federal deficit. And yet, yesterday's protest, supported (maybe even "sponsored") by Fox News was to demonstrate disploeasure with Obama's plan. To take the analysis further, according to the Obama plan, more money will be spent in America and less on foreign countries than Bush's plan. The Obama plan is designed to rebuild the US while the Bush plans were designed to rebuild other countries, like Iraq and Afghanistan. So I wonder why Bush's plans were not protested as vigorously as Obama's (which has not actually been presented yet)?

This is the essence of Fiscal Policy. Fiscal Policy refers to the tax revenues (T) and government expenditures (G) proposed by the government. What is proposed each year by the President is considered non-discretionary spending, while money spent for "incidentals" is considered discretionary spending. The budget is proposed based on anticipated tax revenue assuming full-employment**. This is called the "Full Employment Budget." The goal is for G = T resulting in no deficit and no surplus. However, since the economy is always affected by the business cycle, cyclical unemployment s never 0% and will result in a T less than expected. When this happens, G > T, a deficit results. Government actually spends more than is efficient which is an automatic result of Fiscal Policy - built-in stabilizers. The built-in stabilization of Fiscal Policy puts more money back into the economy than was removed by taxes and acts to stimulate growth, albeit, in small quantities.

If the government anticipates a shortfall of tax revenue, the government can adjust Fiscal Policy to combat or compensate for the short fall. There are two options: 1) increase G (Keynesian economic philosophy used during the Great Depression which was limited in its effectiveness due to protectionist trade policies that prevented the rest of the world from recovering) 2) decreasing T. In both situation, more money is allowed to circulate in the economy than under the "normal" circumstances which will either slow the economic "slide" or revitalize economic growth. President Obama will surely attempt to apply discretionary fiscal policy in order to help improve the economy. He will attempt to increase G to create new jobs to but unemployed back to work and will lower T in order to allow people to keep more of their income.

FY09 Budget (Bush):
T= $2,699,947,000,000
G= $3,107,355,000,000
Deficit = $407,408,000,000

FY10 Budget (Obama) Projected/Estimated:
T= $2,931,348,000,000
G= $3,091,340,000,000
Deficit= $159,992,000,000

(The above data includes discretionary and non-discretionary spending.)

The above data shows a few things:

1. Tax Revenue will be higher for the first Obama budget than the last Bush budget;
2. Government Spending will be lower for the first Obama budget than the last Bush budget;
3. The Budget Deficit will be less for the first Obama budget than the last Bush budget.
   

What is most disturbing is Fox News and their weapons ready to open fire on President Obama the first chance they get, even if they do not report the entire story. Is it true, the government will have to spend more (bigger government)? No. Will it create larger budget deficits? No. But that is not how Fox is going to report it. And then, despite bigger government under Bush, Fox News and Republican cronies are crying "Socialism" from the highest mountains. All of a sudden, after eight years of wasteful spending we are supposed to believe that they are the party of fiscal responsibility? What the estimates are showing is that the Obama budget will try and fight the problems created by decades of poor fiscal responsibility across the economy, and do so with more responsibility than his predecessors. What it boils down to is this, ff they really want to see socialism, drastic measures are possible: forcing employers to retain workers, setting prices, rationing. If we do not want things to get to that point, actions must be taken now.

So save your money, don't buy your symbolic tea. Pay your taxes. Get back to work, and help make America productive again. And as for Fox News, stop sowing the seeds of revolt. Be a responsible media source, and don't tell us that your news reporting is "Fair and Balanced". You have already hoodwinked your pathetic sheep, the rest of us are too smart to listen except when what we hear is so ridiculous that we have no choice but spread some knowledge and useful information.

Fox News: "We report, you decide." I have decided, all glitz, no content.

* For information and data, visit the Government Printing Office (GPO), specifically the data for FY2009.

** Full-employment should not imply a situation where every eligible worker looking for work has a job, instead it occurs when there is no cyclical unemployment (those who are unemployed due to a "shrinking economy"). Those who are unemployed during full-employment are due to frictional unemployment (those in between jobs usually due to some "friction" between the employer and employee - perhaps something as simple as seeking better opportunity), seasonal unemployment (those whose jobs only exist a certain times of year, such as lifeguards), and structural unemployment (those who are out of work because their skills are now obsolete due to advances in technology).