Fiscal Policy in the United States
Encyclopedia
Fiscal policy
is considered any changes the government makes to the national budget in order to influence a nation’s economy. The approach to economic policy in the United States
was rather laissez-faire
until the Great Depression. The government tried to stay away from economic matters as much as possible and hoped that a balanced budget would be maintained.
After the Great Depression
, economists realized that something needed to be done about the government involvement in U.S. economic affairs. The U.S. looked to the influential views of economist John Maynard Keynes
to help fix the crisis the country was in, as well as to prevent it from happening again.
President Franklin D. Roosevelt
first instituted fiscal policies in the United States in The New Deal. The first experiments did not prove to be very effective, but that was in part because the Great Depression had already lowered the expectations of business so drastically.
The Great Depression struck countries in the late 1920s and continued throughout the entire 1930's. It affected some countries more than others, and the effects in the US were detrimental. In 1933, 25 percent of all workers were unemployed in America. Many families starved or lost their homes. Some tried traveling to the West to find work, also to no avail. Because of the prolonged recovery of the United States economy and the major changes that the Great Depression forced the government to make, the creation of fiscal policy is often referred to as one of the defining moments in the history of the United States.
The Great Depression showed the American population that there was a growing need for the government to manage economic affairs. The size of the federal government began rapidly expanding in the 1930s, growing from 553,000 paid civilian employees in the late 1920s to 953,891 employees in 1939. The budget grew substantially as well. In 1939, federal receipts of the administrative budget were 5.50 percent of Gross National Product, GNP
, while federal expenditures were 9.77 percent of GNP. These numbers were up significantly from 1930, when federal receipts averaged 3.80 percent of GNP while expenditures averaged 3.04 percent of GNP.
Another contributor to changing the role of government in the 1930s was President Franklin Delano Roosevelt. FDR was important because of his implication of The New Deal, which was a program that would offer relief, recovery, and reform to the American nation. In terms of relief, new organizations, such as the Works Progress Administration
, saved many U.S. lives. The reform aspect was indeed the most influential in The New Deal, for it forever changed the role of government in the U.S. economy. In essence, it was the beginning of fiscal policy. It was the first time that the government took an active role in attempting to secure American individuals from unseen drastic changes in the market.
Although the repression and reform aspects of The New Deal proved to be effective for President Roosevelt, recovery was an issue that did not. Unemployment rates remained very high throughout the 1930s. It was still difficult for Americans to find jobs. This problem diminished when the government called for many industries to convert to military production in the early 1940s in order to prepare for World War II
.
The Employment Act of 1946 was enacted by the government to keep the economy from plunging back into a post-war depression. The act declared the continuing policy and responsibility of the federal government to use all reasonable means to promote maximum (not full) employment, production, and purchasing power. In addition to focusing on keeping unemployment rates low, the act called for the creation of the Council of Economic Advisors. This council had the task of assisting the president in appointing members to the Joint Economic Committee in the United States Congress
and continuing to develop the role of fiscal policy in the United States.
government has tended to spend more money than it takes in, indicated by a national debt that was close to $1 billion at the beginning of the 20th century. The budget for most of the 20th century followed a pattern of deficits during wartime and economic crises, and surplus
es during periods of peacetime economic expansion.
In 1971, at Bretton Woods
, the US went off the gold standard allowing the dollar to float. Shortly after that, the price of oil was pegged to gold rather than the dollar by OPEC
. The 70s were marked by oil shocks, recessions and inflation in the US. From fiscal years 1970 to 1997; although the country was nominally at peace during most of this time, the federal budget deficit accelerated, topping out (in absolute terms) at $290 billion for 1992.
However, from 1998–2001, gross revenues exceeded expenditures and a surplus resulted. In 1998, the federal budget reported its first surplus ($69 billion) since 1969. In 1999, the surplus nearly doubled to $125 billion, and then again in 2000 to $236 billion.http://www.whitehouse.gov/omb/budget/fy2002/guide04.html However, after a combination of the dot-com bubble
burst, the September 11 attacks, a dramatic increase in government spending (primarily in defense for military operations in Afghanistan
and Iraq) and a $1.35 trillion tax cut, the budget returned to a deficit basis. The budget went from a $236 billion surplus in fiscal year 2000 to a $413 billion deficit in fiscal year 2004. In fiscal year 2005, the deficit began to shrink due to a sharp increase in tax revenue. By 2007, the deficit was reduced to $161 billion; less than half of what it was in 2004 and the budget appeared well on its way to balance once again.
In late 2007 to early 2008, the economy would enter a particularly bad recession as a result of high oil and food prices, and a substantial credit crisis leading to the bankruptcy and eventual federal take over of certain large and well established mortgage providers
. In an attempt to fix these economic problems, the United States federal government passed a series of costly economic stimulus
and bailout
packages. As a result of this, in fiscal year 2008, the deficit would increase to $455 billion and is projected to continue to increase dramatically for years to come due in part to both the severity of the current recession and the high spending fiscal policy the federal government has adopted to help combat the nation's economic woes.http://money.cnn.com/2009/01/13/news/economy/treasury_budget_deficit_Dec08/index.htm The Congressional Budget Office
projects that the federal budget deficit for fiscal year 2009 will spike dramatically to an unprecedented $1.2 trillion, or 8.3% of the gross domestic product (GDP).http://money.cnn.com/2009/01/07/news/economy/cbo_2009_budget_outlook/index.htm?postversion=2009010717. The new budget plan is set to leave the US with a record-breaking deficit of $1.56trn in 2010 http://news.sky.com/skynews/Home/Business/President-Obamas-New-Budget-Proposal-Leaves-The-US-With-A-Record-Breaking-Deficit-Of-16-Trillion/Article/201001415539361?lpos=Business_First_Buisness_Article_Teaser_Region_2&lid=ARTICLE_15539361_President_Obamas_New_Budget_Proposal_Leaves_The_US_With_A_Record-Breaking_Deficit_Of_%241.6_Trillion.
As a percentage of the GDP, within the context of the national economy as a whole, the highest deficit was run during fiscal year 1943 at over 30% of GDP, whereas deficits during the 1980s reached 5-6% of GDP and the deficit for 2005 was 2.6% of GDP, close to the post-World War II average. In 2009, the deficit grew closer to 14% of GDP, which was caused by government actions.
Fiscal policy
In economics and political science, fiscal policy is the use of government expenditure and revenue collection to influence the economy....
is considered any changes the government makes to the national budget in order to influence a nation’s economy. The approach to economic policy in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
was rather laissez-faire
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
until the Great Depression. The government tried to stay away from economic matters as much as possible and hoped that a balanced budget would be maintained.
After the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
, economists realized that something needed to be done about the government involvement in U.S. economic affairs. The U.S. looked to the influential views of economist John Maynard Keynes
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...
to help fix the crisis the country was in, as well as to prevent it from happening again.
President Franklin D. Roosevelt
Franklin D. Roosevelt
Franklin Delano Roosevelt , also known by his initials, FDR, was the 32nd President of the United States and a central figure in world events during the mid-20th century, leading the United States during a time of worldwide economic crisis and world war...
first instituted fiscal policies in the United States in The New Deal. The first experiments did not prove to be very effective, but that was in part because the Great Depression had already lowered the expectations of business so drastically.
The Great Depression
The Great Depression showed the American population that there was a growing need for the government to manage economic affairs. The size of the federal government began rapidly expanding in the 1930s, growing from 553,000 paid civilian employees in the late 1920s to 953,891 employees in 1939. The budget grew substantially as well. In 1939, federal receipts of the administrative budget were 5.50 percent of Gross National Product, GNP
GNP
Gross National Product is the market value of all products and services produced in one year by labor and property supplied by the residents of a country...
, while federal expenditures were 9.77 percent of GNP. These numbers were up significantly from 1930, when federal receipts averaged 3.80 percent of GNP while expenditures averaged 3.04 percent of GNP.
Another contributor to changing the role of government in the 1930s was President Franklin Delano Roosevelt. FDR was important because of his implication of The New Deal, which was a program that would offer relief, recovery, and reform to the American nation. In terms of relief, new organizations, such as the Works Progress Administration
Works Progress Administration
The Works Progress Administration was the largest and most ambitious New Deal agency, employing millions of unskilled workers to carry out public works projects, including the construction of public buildings and roads, and operated large arts, drama, media, and literacy projects...
, saved many U.S. lives. The reform aspect was indeed the most influential in The New Deal, for it forever changed the role of government in the U.S. economy. In essence, it was the beginning of fiscal policy. It was the first time that the government took an active role in attempting to secure American individuals from unseen drastic changes in the market.
Although the repression and reform aspects of The New Deal proved to be effective for President Roosevelt, recovery was an issue that did not. Unemployment rates remained very high throughout the 1930s. It was still difficult for Americans to find jobs. This problem diminished when the government called for many industries to convert to military production in the early 1940s in order to prepare for World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
.
World War II and effects
World War II forced the government to run huge deficits, or spend more than they were economically generating, in order to keep up with all of the production the US military needed. By running deficits, the economy recovered, and America rebounded from its drought of unemployment. The military strategy of full employment had a huge benefit: the government’s massive deficits were used to pay for the war, and ended the Great Depression. This phenomenon set the standard and showed just how necessary it was for the government play an active role in fiscal policy.The Employment Act of 1946 was enacted by the government to keep the economy from plunging back into a post-war depression. The act declared the continuing policy and responsibility of the federal government to use all reasonable means to promote maximum (not full) employment, production, and purchasing power. In addition to focusing on keeping unemployment rates low, the act called for the creation of the Council of Economic Advisors. This council had the task of assisting the president in appointing members to the Joint Economic Committee in the United States Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
and continuing to develop the role of fiscal policy in the United States.
Modern fiscal policy
The United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
government has tended to spend more money than it takes in, indicated by a national debt that was close to $1 billion at the beginning of the 20th century. The budget for most of the 20th century followed a pattern of deficits during wartime and economic crises, and surplus
Economic surplus
In mainstream economics, economic surplus refers to two related quantities. Consumer surplus or consumers' surplus is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay...
es during periods of peacetime economic expansion.
In 1971, at Bretton Woods
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...
, the US went off the gold standard allowing the dollar to float. Shortly after that, the price of oil was pegged to gold rather than the dollar by OPEC
1973 oil crisis
The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...
. The 70s were marked by oil shocks, recessions and inflation in the US. From fiscal years 1970 to 1997; although the country was nominally at peace during most of this time, the federal budget deficit accelerated, topping out (in absolute terms) at $290 billion for 1992.
However, from 1998–2001, gross revenues exceeded expenditures and a surplus resulted. In 1998, the federal budget reported its first surplus ($69 billion) since 1969. In 1999, the surplus nearly doubled to $125 billion, and then again in 2000 to $236 billion.http://www.whitehouse.gov/omb/budget/fy2002/guide04.html However, after a combination of the dot-com bubble
Dot-com bubble
The dot-com bubble was a speculative bubble covering roughly 1995–2000 during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the more...
burst, the September 11 attacks, a dramatic increase in government spending (primarily in defense for military operations in Afghanistan
War in Afghanistan (2001–present)
The War in Afghanistan began on October 7, 2001, as the armed forces of the United States of America, the United Kingdom, Australia, and the Afghan United Front launched Operation Enduring Freedom...
and Iraq) and a $1.35 trillion tax cut, the budget returned to a deficit basis. The budget went from a $236 billion surplus in fiscal year 2000 to a $413 billion deficit in fiscal year 2004. In fiscal year 2005, the deficit began to shrink due to a sharp increase in tax revenue. By 2007, the deficit was reduced to $161 billion; less than half of what it was in 2004 and the budget appeared well on its way to balance once again.
In late 2007 to early 2008, the economy would enter a particularly bad recession as a result of high oil and food prices, and a substantial credit crisis leading to the bankruptcy and eventual federal take over of certain large and well established mortgage providers
Federal takeover of Fannie Mae and Freddie Mac
The federal takeover of Fannie Mae and Freddie Mac refers to the placing into conservatorship of government sponsored enterprises Fannie Mae and Freddie Mac by the U.S. Treasury in September 2008. It was one financial event among many in the ongoing subprime mortgage crisis.On September 6, 2008,...
. In an attempt to fix these economic problems, the United States federal government passed a series of costly economic stimulus
Economic Stimulus Act of 2008
The Economic Stimulus Act of 2008 was an Act of Congress providing for several kinds of economic stimuli intended to boost the United States economy in 2008 and to avert a recession, or ameliorate economic conditions. The stimulus package was passed by the U.S. House of Representatives on January...
and bailout
Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 (Division A of , commonly referred to as a bailout of the U.S. financial system, is a law enacted in response to the subprime mortgage crisis...
packages. As a result of this, in fiscal year 2008, the deficit would increase to $455 billion and is projected to continue to increase dramatically for years to come due in part to both the severity of the current recession and the high spending fiscal policy the federal government has adopted to help combat the nation's economic woes.http://money.cnn.com/2009/01/13/news/economy/treasury_budget_deficit_Dec08/index.htm The Congressional Budget Office
Congressional Budget Office
The Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides economic data to Congress....
projects that the federal budget deficit for fiscal year 2009 will spike dramatically to an unprecedented $1.2 trillion, or 8.3% of the gross domestic product (GDP).http://money.cnn.com/2009/01/07/news/economy/cbo_2009_budget_outlook/index.htm?postversion=2009010717. The new budget plan is set to leave the US with a record-breaking deficit of $1.56trn in 2010 http://news.sky.com/skynews/Home/Business/President-Obamas-New-Budget-Proposal-Leaves-The-US-With-A-Record-Breaking-Deficit-Of-16-Trillion/Article/201001415539361?lpos=Business_First_Buisness_Article_Teaser_Region_2&lid=ARTICLE_15539361_President_Obamas_New_Budget_Proposal_Leaves_The_US_With_A_Record-Breaking_Deficit_Of_%241.6_Trillion.
As a percentage of the GDP, within the context of the national economy as a whole, the highest deficit was run during fiscal year 1943 at over 30% of GDP, whereas deficits during the 1980s reached 5-6% of GDP and the deficit for 2005 was 2.6% of GDP, close to the post-World War II average. In 2009, the deficit grew closer to 14% of GDP, which was caused by government actions.
See also
- Office of Management and Budget
- Congressional Budget OfficeCongressional Budget OfficeThe Congressional Budget Office is a federal agency within the legislative branch of the United States government that provides economic data to Congress....
- U.S. public debt
- Foriegn aid
External links
- Savings rate viz Fiscal Deficit Historical comparism of the Savings rate viz Fiscal Deficit ( since 1981 )