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14 Mar 2019

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1. The federal government calculates the budget on a fiscal year that begins each year on October 1 and ends the following September 30. At the beginning of the 2005 fiscal year, the Congressional Budget Office [CBO] forecast that the federal budget deficit would be $368 billion. The actual budget deficit for fiscal 2005 was only $319 billion. Federal expenditures were $37 billion less than the CBO had forecast, and federal revenue was $12 billion more than the CBO had forecast.

a. Is it likely that the economy grew faster or more slowly during fiscal 2005 than the CBO has expected? Explain your reasoning.

b. Suppose that Congress and the president were committed to balancing the budget each year. Does what happened during 2005 provide any insights into difficulties they might run into in trying to balance the budget every year?

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Jarrod RobelLv2

16 Mar 2019

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Big banks urge Ottawa to spend $20-billion in rapid stimulus

"Two of Canada's big banks want the federal government to pump $20-billion into an economic stimulus for a fast jolt to the flagging economy. Bank of Nova Scotia urged Ottawa to spend that much by mid-2017. Such a measure, the bank said, would equal 1 percent of gross domestic product and would play into its new economic forecast for GDP growth of 1.3 percent this year and 2.5 percent next. Canadian Imperial Bank of Commerce called for $20-billion in the government's first year, saying the pledges on the table just aren't enough. The Liberal government of Prime Minister Justin Trudeau has indeed promised to spend billions in infrastructure stimulus. But, beyond the recent campaign pledges, there have been no details on the final amount, the targets, and the timeline. And remember, the fiscal outlook has changed rapidly, with the Liberals now forecasting a deficit of $18-billion even without their promised spending. Canadians will get the details when Finance Minister Bill Morneau unveils his budget on March 22. While Scotiabank and CIBC are the first to have specific calls, other bank economists have said the further stimulus would be welcome, and that the government certainly has the fiscal room to accommodate it. Scotiabank painted a weak economic picture for 2016, particularly for the oil-shocked province of Alberta, and a national unemployment rate that will top 7 per cent this year and next. It projected the economy of Alberta, which had been the country's economic engine until the oil route, will contract by a further 1.9 percent this year, with a jobless rate of 7.5 percent. Our Canadian forecast incorporates our recommendation for the federal fiscal stimulus of $20-billion, equivalent to 1 per cent of GDP, implemented during the second of 2016 and the first half of 2017, said Aron Gampel, Scotiabank's deputy chief economist. "This stimulus would be over and above the deficit resulting from weaker economic conditions, estimated for fiscal 2016-17 at $18-billion by the federal government," he added. "The stimulus should be designed to: deliver a rapid economic impact; raise Canada's economic capacity and thus our longer-term growth prospects; and, facilitate adjustments in the provinces most affected by weak commodity prices. Once the Canadian economy no longer requires policy support, targeting a declining ratio of net debt-to-GDP should resume." CIBC also weighed in on the stimulus debate today, calling for $20-billion in stimulus over two years. The Liberal pledges had been for $5-billion infrastructure and a further $5-billion in other measures in their first two years in power. But CIBC World Markets doesn't think that's enough given the country's economic troubles. "Federal stimulus under that scenario would be barely more than 0.5 percent of GDP, arguably too little to do the job, particularly with some provinces applying fiscal brakes," said CIBC's Royce Mendes and Avery Shenfeld. "We see a $20-billion stimulus program with a $40-billion deficit as being more appropriate, but given the political sensitivities, the government might show something closer to $35-billion for 2016-17, while perhaps taking on some further stimulus charged to the outgoing year." Some academics believe that in this low-interest-rate environment, what we need is a strong blast of fiscal stimulus to drive employment and growth. They argue that we should reject fiscal austerity and embrace public investment. Indeed, that has been the primary economic platform for the Liberal party, and for some, the reason for them winning a majority in the last election."

(a) The IMF "It is Mostly Fiscal" appears to be what Trudeau and his economic team have bought into. Explain why further fiscal austerity could be particularly painful for the Canadian economy, and how deficit spending may lower the government debt to GDP ratio. Be sure to illustrate using the IS-LM and the AD-AS frameworks.

(b) Discuss why Canadian banks are particularly concerned that the government fiscal stimulus plan may not be enough.

(c) Discuss what are some of the problems with using expansionary monetary policy in an environment of low interest rates. That is, describe the problem of a "liquidity trap."

mauveworm149

Dems, GOP talk up deficit reduction, but don't act

WASHINGTON (AP) â Liberals' loud objections to White House proposals for slowing the growth of huge social programs make it clear that neither political party puts a high priority on reducing the deficit, despite much talk to the contrary.

For years, House Republicans have adamantly refused to raise income taxes, even though U.S. taxes are historically low, and the Bush-era tax cuts were a major cause of the current deficit.

And now, top Democrats are staunchly opposing changes to Medicare and Social Security benefits, despite studies showing the programs' financial paths are unsustainable.

Unless something gives, it's hard to see what will produce the significant compromises needed to tame the federal debt, which is nearing $17 trillion.

"There's not much of an appetite for deficit reduction," said Bob Bixby of the Concord Coalition, which pushes for "responsible fiscal policy."

There might be a few small steps this year, he said, when the government again needs to raise its borrowing limit. But a "grand bargain" involving significant spending cuts and revenue increases seems unlikely, Bixby said.

He added, "It's a little depressing to hear the reactions to the president's budget, from both sides."

There was nothing surprising about Republican denunciations of Obama's proposed tax increases, which he wants to combine with spending cuts to reduce the deficit.

The newer wrinkle was the left's sharp criticism of his proposals to slow the growth in Medicare and Social Security benefits, provided Republicans agree to new revenues. Obama has offered Republicans such a deal before. But this month's budget proposal gave it a new imprimatur.

The group MoveOn.org said Wednesday that supporters "who are outraged at President Obama's proposal to cut Social Security benefits will protest and deliver petitions" this week.

Sen. Bernie Sanders, a liberal independent from Vermont, is leading a similar petition drive, opposing "any benefit cuts to Social Security, Medicare or Medicaid." The deficit, his letter says, "was primarily caused during the Bush years by two unpaid-for wars, huge tax breaks for the rich and a prescription drug program" for Medicare, funded through borrowing. He suggests that higher taxes on the wealthy are the fairest way to tackle the deficit.

Democrats cite several reasons to raise taxes on high-income households. Obama campaigned for such tax increases in 2008 and 2012 but accomplished them only partially with the "fiscal cliff" resolution of Jan. 1.

Major tax cuts in 2001 and 2003 played big roles in turning a federal budget surplus into soaring deficits, according to research by the Congressional Budget Office and others. And by many measures, the U.S. tax burden in near historic lows.

Households earning roughly the national median income paid, on average, 11.1 percent of their income in total federal taxes in 2009, the most recent year for such data. That's the lowest level in more than 30 years, the CBO says.

Nonetheless, House Republicans have placed their highest priority on refusing to raise income tax rates, effectively ranking it above all other goals.

"The president got his tax hikes on Jan. 1," House Speaker John Boehner, R-Ohio, is fond of saying. It's a reference to the $620 billion in new revenues, over 10 years, that Republicans were unable to stop because of the "fiscal cliff" law, resolved on New Year's Day.

If it's easy to make a case for higher revenues, the same is true for slowing the growth of Social Security and Medicare benefits. For decades, studies have warned of approaching trouble in these popular but costly programs, as health care costs rise and baby boomers begin to retire.

"Both Medicare and Social Security cannot sustain projected long-run program costs under currently scheduled financing, and legislative modifications are necessary to avoid disruptive consequences for beneficiaries and taxpayers," the Social Security Administration says, summarizing findings by the two programs' trustees.

"The early detection light has been going on for a while, and there has been a failure to act," Social Security trustee Charles P. Blahous recently told a House panel. If lawmakers are to preserve the programs for future retirees, he said, they will have to accept much more "political pain" than officials endured during a 1983 overhaul that included "several extremely controversial measures."

Obama has proposed an often-discussed step, which deals with government accounting in general, not just entitlement programs. If Congress agrees to higher tax revenues, the president said, he would back a slower growth calculation for cost-of-living increases for Social Security benefits, plus higher Medicare premiums for higher-income seniors.

Interest groups have criticized both ideas. AARP calls the slower cost-of-living formula a "harmful change," and urges seniors to oppose it.

American voters can largely blame themselves when Congress is more talk than action on deficit reduction. Americans routinely say they want a smaller federal debt, but not at the cost of programs they hold dear â including Social Security and Medicare.

A CBS News poll in March found that most Americans want to cut spending and raise taxes to reduce the deficit. But 4 in 5 oppose cuts to Social Security or Medicare. And two-thirds are unwilling to have their own taxes raised in the name of deficit reduction.

When Pew Research asked which was more important â reducing the national debt or keeping Social Security and Medicare benefits as they are now â the public sided with safeguarding the benefits programs, 53 percent to 36 percent.

The deficit-spending partisanship continued Wednesday. On a party-line vote, House Ways and Means Committee Republicans passed a bill to protect Social Security recipients and investors in Treasury bonds if the government hits its borrowing limit and can't pay all its bills later this year. Democrats say if the federal government starts reneging on any obligations â even if it pays bondholders â financial markets will lose faith and the economy will tank.

Some Democrats fear a lose-lose situation if they support Obama's proposals. First, they could be attacked from the left for tweaking the programs that many Democrats see as their party's greatest legacy. And second, Republicans might accuse them of "raiding Medicare" in next year's congressional elections. That battle cry proved effective in 2010 after Obama's health care overhaul bill was passed.

Democrats call such tactics shamelessly hypocritical. Republicans, they note, have long called for reining in entitlement spending.

Boehner rebuked a top GOP campaign figure for hinting at a renewal of the "raiding Medicare" attacks. But Reince Priebus, the national Republican Party chairman, seemed eager to revive the question of whether Democratic trims to Medicare's costs amount to an unfair cut in benefits.

9. Read the AP article âDems, GOP talk up deficit reduction, but don't act (Links to an external site.)â by C. Babington (Apr25â13).

a. What are the two basic ways of shrinking a budget deficit?

b. Which of your answers above are Republicans vehemently against? What are the potential negative economic effects of implementing this basic policy?

c. Which of your answers above are Democrats strongly opposed to? What are the potential negative economic effects of implementing this basic policy?

lavenderpug75

Read The Economist's articles, "The return of economic nationalism," "The battle of Smoot-Hawley," and Business Week's article, "Jobs and Protectionism in the Stimulus Package."

Do you believe the provision of "Buy America" placed in the $787 billion stimulus package by Congress was necessary during the recession to ensure American jobs and strengthen the American Economy?

Or was this Congressional provision a form of protectionism similar to the Smoot-Hawley bill passed in 1930?

The world economy

The return of economic nationalism

Feb 5th 2009

From

The Economist

print edition

A spectre is rising. To bury it again, Barack Obama needs

to take the lead

Illustration by Jon Berkeley

MANAGING a crisis as complex as this one has so far called for nuance and pragmatism

rather than stridency and principle. Should governments prop up credit markets

by offering

guarantees or creating bad banks? Probably both. What package of fiscal stimulus would be

most effective? It varies from one country to the next. Should banks be nationalised? Yes,

in some circumstances. Only the foolish and the partisan have r

ejected (or embraced) any

solutions categorically.

But the re

emergence of a spectre from the darkest period of modern history argues for a

different, indeed strident, response. Economic nationalism

the urge to keep jobs and

capital at home

is both turnin

g the economic crisis into a political one and threatening the

world with depression. If it is not buried again forthwith, the consequences will be dire.

Devil take the hindmost

Trade encourages specialisation, which brings prosperity; global capital marke

ts, for all their

problems, allocate money more efficiently than local ones; economic co

operation

encourages confidence and enhances security. Yet despite its obvious benefits, the

globalised economy is under threat.

Congress is arguing about a clause in the $800 billion

plus stimulus package that in its most

extreme form would press for the use of American materials in public works. Earlier, Tim

Geith

ner, the new treasury secretary, accused China of âmanipulatingâ its currency,

prompting snarls from Beijing. Around the world, carmakers have lobbied for support (see

article

), and some have got it. A host of industries, in countries from India to Ecuador, want

help from their governments.

The grip of nationalism is tightest in banking (see

article

). In France and Britain, politicians

pouring taxpayersâ money into ailing banks are demanding that the cash be lent at home.

Since banks are reducing overall lending, that means repatriating cash. Regulators are

thinking nationally too. Switzer

land now favours domestic loans by ignoring them in one

measure of the capital its banks need to hold; foreign loans count in full.

Governments protect goods and capital largely in order to protect jobs. Around the world,

workers are demanding help from t

he state with increasing panic. British strikers, quoting

Gordon Brownâs ill

chosen words back at him, are demanding that he provide âBritish jobs

for British workersâ (see

article

). In France more than 1m people stayed away from work on

January 29th, marching for jobs and wages. In Greece police used tear gas to control

farmers calling for even more subsidies.

Three arguments are raised in defence of economic nationalism: t

hat it is justified

commercially; that it is justified politically; and that it wonât get very far. On the first point,

some damaged banks may feel safer retreating to their home markets, where they

understand the risks and benefit from scale; but that is

a trend which governments should

seek to counteract, not to encourage. On the second point, it is reasonable for politicians to

want to spend taxpayersâ money at home

so long as the costs of doing so are not

unacceptably high.

In this case, however, the c

osts could be enormous. For the third argument

that

protectionism will not get very far

is dangerously complacent. True, everybody sensible

scoffs at Reed Smoot and Willis Hawley, the lawmakers who in 1930 exacerbated the

Depression by raising American tar

iffs. But reasonable people opposed them at the time,

and failed to stop them: 1,028 economists petitioned against their bill. Certainly, global

supply

chains are more complex and harder to pick apart than in those days. But when

nationalism is on the marc

h, even commercial logic gets trampled underfoot.

The links that bind countriesâ economies together are under strain. World trade may well

shrink this year for the first time since 1982. Net private

sector capital flows to the

emerging markets are likely t

o fall to $165 billion, from a peak of $929 billion in 2007. Even

if there were no policies to undermine it, globalisation is suffering its biggest reversal in the

modern era.

Politicians know that, with support for open markets low and falling, they must

be seen to

do something; and policies designed to put something right at home can inadvertently eat

away at the global system. An attempt to prop up Irelandâs banks last year sucked deposits

out of Britainâs. American plans to monitor domestic bank lending

month by month will

encourage lending at home rather than abroad. As countries try to save themselves they

endanger each other.

The big question is what America will do. At some moments in this crisis it has shown the

way

by agreeing to supply dollars to

countries that needed them, and by guaranteeing the

contracts of European banks when it rescued a big insurer. But the âBuy Americanâ

provisions in the stimulus bill are alarmingly nationalistic. They would not even boost

American employment in the short r

un, because

just as with Smoot

Hawley

the inevitable

retaliation would destroy more jobs at exporting firms. And the political consequences would

Protectionism

The battle of Smoot

Hawley

Dec 18th 2008

From

The Economist

print edition

A cautionary tale about how a protectionist

measure opposed by all right

thinking people

was passed

Library of Congress

Hawley and Smoot, the bogeymen of trade

EVEN when desperate, Wall Street bankers are not given to grovelling. But in June

1930 Thomas Lamont, a partner at J.P. Morga

n, came close. âI almost went down

on my knees to beg Herbert Hoover to veto the asinine Hawley

Smoot Tariff,â he

recalled. âThat Act intensified nationalism all over the world.â

According to David Kennedy, an historian, Lamont was âusually an influential

economic adviserâ to the American president. Not this time. Hoover signed the bill

on June 17th: âthe tragic

comic finaleâ, said that weekâs

Economist

, âto one of the

most amazing chapters in world tariff history...one that Protectionist enthusiasts the

worl

d over would do well to study.â

The Tariff Act of 1930, which increased nearly 900 American import duties, was

debated, passed and signed as the world was tumbling into the Depression. Its

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