Relating Politics and Fiscal Policy…Textbooks and TV

This week, America went to the polls. We voted. And voted for another 4 years with Obama as our leader. Beyond his leadership, we also voted for his fiscal policy…whether we as voters understood/understand that or not. For my entry this election week, I am reflecting on the election and how America understands (or dosen't) fiscal policy when making their choice.

I have always known that I did not understand even a surface scratch about what fiscal policy really meant. I knew it was taxes and government spending, both something that I personally support, but do I really understand why I support these things? Or what they really do? Nope. Taking economics again is opening my eyes to a much larger view of fiscal policy, and what my high level beliefs really do mean in the fiscal policy spectrum…and how hard it is for the average voter to dissect the thinking behind these approaches.

It has been said, over and over for months now, that the #1 issue for voters was the economy, and how our government is either hindering or helping it to recover. This week we covered some very interesting, very basic sets of economic principles that discuss how government spending, taxes, GDP and employment are related. Bottom line, government spending can drive increased aggregate demand which will push the unemployment rate back to a level of higher (and possibly full) employment for the country. Seeing how these ideas relate, and impact each other, show me that my beliefs that taxing and spending are a good thing, even if it raises national debt, and are helping us to avoid another economic collapse.

 

Changes in government spending, changes in tax levels and changes in transfer payments through programs like social security, all impact income and employment levels, as well as inflation rates. Clearly, with stagnant incomes and a high rate of unemployment, the government should be targeting a fiscal policy that will bring those both up. Expansionary policy, that invests heavily to induce full employment, cannot happen without implementing less popular political moves like raising taxes and borrowing money (debt).

A high level summary of President Obama’s fiscal policy (according to this National Journalreport): Economic stimulus now, deficit reduction over the long term. Tax the wealthy to raise additional revenues. Trim military spending, Medicare, federal pensions, and farm subsidies.

Clearly, this approach is a mix of the three main components discussed above. Both economic stimulus (government spending) is the expansionary policy in action, and the increased tax on the wealthy is the funding source. Another component of boosting up the economy in expansionary fiscal policy is increasing transfer payments, which is not reflected in Obama’s plan to reduce the transfer payment streams listed above.

There are opinions that oppose this expansionary approach with a preference to lower taxes, and lower spending to allow private investment in the market to flourish. However, historical data shows that even in times of reduced taxation, the private investment does not dramatically increase (this articlecited in Norm’s blog expands on the idea further). Through that was what Mitt Romney was promoting for his fiscal policy reasoning.

Through this election, I am curious how much the average voter even understood why the candidate’s policies differed. What is presented to the public are two sentence sound bites to what is a large and complex issue…and dramatically shapes an administration far more than their laundry list of issues. Right now we are in need of dramatic change, and it seems to me that government investment, paid for by us, the people, is the way to move forward. I wonder how the US electorate would vote after everyone took a semester of macroeconomics.