1. Fiscal & Monetary Policy
Spring 2013
Topic 6

2. What are they?
Fiscal policy
Government expenditures and taxation
Monetary policy
Management of the money supply

3. To what end?
“Do no harm”
The “golden rule” of monetary growth

4. To what end?
“Do no harm”
Make things better
Stabilization

5. How does fiscal policy
work (in theory)?
G and the AD curve
T and the AD curve

6. Is that all?
The role of multipliers

7. Types of fiscal stabilizers
Automatic
Discretionary

8. Implications for the
budget

9. Violating stabilization

10. Violating stabilization

11. Violating stabilization

12. Debt implications

13. Debt implications

14. How is that possible?
The debt game
An odd legal limit
Putting in place odd incentives
1980s Social Security reform

15. How does monetary
policy work (in theory)?
Money and the interest rate channel
Normal and quantitative easing

16. Do either really work?

17. What are the issues?
Policy lags
Data collection
Data analysis
Policy formulation
Implementation
Impact

18. What are the issues?
Policy lags

19. What are the issues?
Policy lags
Fiscal offsets
Savings
Crowding out

20. What are the issues?
Policy lags
Fiscal offsets
Monetary offset
Velocity

21. What are the issues?
Policy lags
Fiscal offsets
Monetary offset
Policy that generates its own need

22. Where does that leave
us today?
In debt
Debt to the Penny

23. Where does that leave
us today?
In debt
It isn’t just the government

24. Where does that leave
us today?
In debt
Moving in an unfortunate direction

25. 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

26. So what should we do?
Nothing now?
Wrong time to fix the problem
Wait for recovery
Does history promise better behavior?

27. So what should we do?
Nothing ever?
Monetize the debt
Likely inflation?
Rough (VERY) ballpark of 8 percent per
year

28. So what should we do?
Cut spending?
Short-term cost
What to cut?

29. So what should we do?
Raise taxes?
Short-term cost
Whose taxes?

30. The current system

31. Options to get more
taxes
Raise rates
The odd promise of the Laffer Curve
Keane and Rogerson, 2012
Labor supply elasticity estimates

32. Options to get more
taxes
Raise rates
A new system
Not revenue neutral
Flat tax?
Code simplification?