How many times have you heard the expression "Fiscal Policy" without really being sure what it means? Well, this time around, THAT MONEY SHOW asked David Backus, professor of economics at New York University's Leonard N. Stern Graduate School of Business, to define the expression for us, and to tell us what significance the term should have for the average person.
According to Backus, "Economists refer to the combination of government spending and tax policy as fiscal policy." What does that mean? Well, Congress and the President set rules for how the government spends our tax dollars, and how we plan for future government spending.
"In the United States this year, federal, state, and local governments will spend about three trillion dollars. That's a lot of money, no matter how rich you are," Backus said. "The federal surplus this year is about two hundred billion dollars. The question is, what are we going to do with it. Some propose that we could reduce taxes and still be able to balance the government budget. Others suggest the U.S. economy will go into a recession at some point, in which case tax revenues could decline rapidly and we would find that there is no more surplus. The current question we are faced with is, are we in a recession, and, if we are, could fiscal policy help."
Huh? It's simple: If we are in a recession, could we improve the situation by lowering taxes and modifying the kinds of programs we're spending money on? According to Backus, "In principle it could, but in practice, the lead time on changing taxes, and on changing spending programs, is simply too long to be able to react quickly enough to have an impact on a recession."
To hear Professor Backus' full explanation, check out our One Minute MBA video clip. Just click the appropriate connection speed in the video box on the right column of this page.