Author: John Bouman

Discretionary Fiscal Policy Discretionary fiscal policy represents changes in government spending and taxation that need specific approval from Congress and the President. Examples include increases in spending on roads, bridges, stadiums, and other public works. Because discretionary fiscal policy is subject to the lags discussed in the last section, its effectiveness is often criticized. Automatic stabilizers, on the other hand, do not need government approval and take effect immediately.   Automatic Stabilizers Automatic stabilizers are changes in government spending and taxation that do not need approval by Congress or the President. Automatic stabilizers are expense and taxation items that are part of existing economic programs. Examples of automatic stabilizers include 1. Unemployment compensation. When the economy turns down, the government’s expense on unemployment compensation automatically increases as more people lose their jobs. According to Keynesians, this increase in government spending prevents the economy from a more severe slowdown compared to what would occur if no unemployment compensation existed. 2. Subsidies to farmers. When the economy turns down and farmers struggle, the government’s expenses on farmer subsidies automatically increase. According to Keynesians, this increase in government spending stimulates the economy. 3. A progressive tax system. Most industrialized countries’ tax systems are set up to tax higher-income individuals and corporations at higher rates. If the economy slows down, incomes decrease, and people pay less money in taxes. This decrease in tax...

Federal Government Expenditures Federal government expenditures in selected years from 1940 through 2024 are included in the table below. The table shows that in nominal terms, the size of the federal government in 2024 is approximately 730 times greater than in 1940. After adjusting for inflation, the size of the government is almost 40 times greater than in 1940. Since 1940, Social Security, Medicare, Medicaid, unemployment and welfare programs, defense, and interest on the debt have experienced the largest increases. Federal government expenditures skyrocketed and tax revenues declined in 2020 due to the pandemic. Most numbers came down in the years following, but compared to pre-pandemic years, the numbers are significantly higher. The federal deficit (the difference between its spending and its revenue) exceeded $3 trillion in 2020 and in 2024 was nearly $1.9 trillion. The total national debt of the United States government was $36.3 trillion by the end of 2024. During the 2020 pandemic federal spending on unemployment compensation, small business loans and grants, general purpose fiscal assistance, the Coronavirus Relief Fund, and the Public Health and Social Services Emergency Fund increased significantly. In addition, Medicare and Medicaid spending increased considerably due to expansions approved in 2019. Federal Government Spending Category 1940 1950 1960 1970 1980 1990 2000 2007 2009 2011 2015 2017 2019 2020 2022 2023 2024 National Defense 1.6 13.7 48.13 81.69 134 299.3 294.4...

Federal Government Taxes Government expenditures are financed for the most part by government taxes. Below is a table that includes the most important United States federal government taxes and other receipts. The figures are in billions of United States dollars. Revenue Source 2000 2007 2008 2009 2011 2014 2016 2018 2019 2020 2022 2023 2024 1 Individual income taxes 1,004.5 1,168.8 1,145.7 953.0 1,091.5 1,395 1,546 1,684 1,698 1,609 2,632 2,328 2,503 2 Social insurance and retirement receipts 652.9 873.4 900.2 899.2 818.8 1,023 1,115 1,171 1,242 1,310 1,484 1,675 1,721 3 Corporate income taxes 207.3 342.1 304.3 146.8 181.1 321 300 205 216 212 425 546 613 4 Excise and Transportation taxes 68.9 57.1 67.3 66.3 72.4 93 95 95 99 87 88 91 100 5 Other (estate and gift taxes, customs duties and fees, Federal Reserve Deposits, etc.) 92.0 98.8 106.7 91.4 139.7 189 212 176 182 204 269 161 145 Total receipts 2,025.5 2,540.1 2,524.3 2,156.7 2,303.5 3,021 3,368 3,330 3,438 3,421 4,897 4,802 5,082 Source: White House Office of Management and Budget, Visit White House Budget Tables (table 2.1) for more details. Individual income taxes and Social Security taxes are responsible for the majority of the federal government’s tax receipts. After the 2008 recession, revenues declined considerably, but mostly rose again several years later due to a growing economy and increases in the Social Security retirement age....

State Government Spending Total expenditures for all 50 states in the United States exceeded $3 trillion in 2024. General expenditures by function rounded in billions of dollars are listed in the table below. Welfare and education are the largest expenditures by state governments. The expense on education is shared by states and counties, with the counties spending the majority of their funds on county public schools, and the states sharing the burden of financing post-secondary state education. The programs that experienced large increases in their budgets in recent years include education, welfare, hospitals, highways, government administration, and insurance trusts. Public welfare expenditures include unemployment compensation payments, food stamps, school lunch subsidies, and other income maintenance programs. Spending Item 2004 Spending in billions (rounded to the nearest billion) 2007 Spending in billions (rounded to the nearest billion) 2011 Spending in billions (rounded to the nearest billion) 2015 Spending in billions (rounded to the nearest billion) 2018 Spending in billions (rounded to the nearest billion) 2020 Spending in billions (rounded to the nearest billion) 2021 Spending in billions (rounded to the nearest billion) 2024 (latest available) Spending in billions (rounded to the nearest billion) Education 429 515 592 638 708 756 786 846 Welfare Programs 339 393 497 609 707 793 876 913 Hospitals 40 48 66 76 90 104 109 110 Health 50 58 60 63 64 77 92 95...

Public Choice In this unit, we have learned about fiscal policy and the expenditures and revenues of the various forms of government in the United States. The economic theory that studies the effectiveness of government (public) spending and taxation and the behavior of politicians and legislators is called public choice. Public choice became popular after James Buchanan (pictured) and Gordon Tullock from George Mason University published their The Calculus of Consent in 1962 and it received widespread public attention after James Buchanan won a Nobel Prize in 1986 for his public choice research. Government Failures Due to the influence of John Maynard Keynes, the focus had been on “market failures” and what the government could do to fix these. Public choice theorists pointed out that there are also “government failures.” Politicians are no different from private sector participants in that they are motivated by their self-interest. Politicians’ self-interest includes wanting to get re-elected during the upcoming elections and a need for power and recognition. When voters are satisfied, politicians generally will get re-elected. Voters are satisfied when their favorite programs are funded and when tax rates are relatively low. But many voters are not aware of specific funding and programs and laws, especially if they don’t affect them. Some voters simply don’t care about many laws and whom they vote for, because they believe that their one vote will...