analyticsbox | Oct 06, 2021
Fiscal Policy
Understanding the Long and Short Term Implications
Fiscal policy is simply the governmental policies that involve raising money (taxation) and spending money. Fiscal Policy is controlled by the Legislative Branch and the Executive Branch of the Federal Government.
The federal government has many basic obligations to perform, such as defense and public safety, law and order (police and courts), etc. But there are many other things the government does that are not necessarily required functions, but are done for the perceived good and welfare for the country, such as the safety network for people in distress.
Fiscal policy influences many things and can be a tool to accomplish specific goals. It is often used to influence the economy through stimulus (deficit spending) in weak economies, or stabilization when the economy is overheated and needs to cool off.
Monetary policy, on the other hand, is policy which deals with the money supply and interest rates. This is conducted primarily by the central bank, which is independent of the federal government.
The goal of these policies is to promote sustainable growth in the economy.
Historically, the general thought was that there should be a balanced budget with fiscal surpluses and fiscal deficits more or less balancing over time. However in the last 50 or 60 years that has not been the case.
In 1960, the debt had slowly accumulated to around $280 Billion, or about 54% of the Gross Domestic Product (GDP), a number thought to be manageable (most of that, around 230 Billion was a result of WWII and quite stable until the 60’s).
From the 60’s through the early 80’s, the debt grew every year but at a modest pace and by 1981, it had increased to $988 Billion, but only represented 31% of GDP as the economy grew much faster than the debt. However in the last 40 years, there was a rapidly changing scenario, with only 4 years of surplus in the late 90’s. By 2000, the debt had risen to $5.7 Trillion, but still only 55% of GDP, a similar ratio to 1960.
Since 2000, debt has risen dramatically to $28.5 Trillion or 130% of GDP. With current fiscal policies in place and under consideration, there will be over Trillion dollar deficits as far as we can project. This is trouble, see No Spin #4, about the Ponzi Scheme the government is running.
The Bottom Line
As deficits grow endlessly and the debt grows more and more each year, interest also accumulates and makes it harder to ever balance the budget. The ballooning debt and the need to fund the shortfalls which will start occurring in the unfunded liabilities (See No Spin #6) starting in the next 5-10 years will lead to extraordinary problems and eventual default on the debt.
If we do not restore fiscal sanity and bring the deficits under control, the light at the end of the tunnel will be a train and will run us over. No matter how well meaning the proposed programs are, it will mean nothing if we run out of money!
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