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April 14, 2009

Manipulating Budget Deficits

By Wade Rousse

Advocates of an aggressive fiscal policy and big spending usually argue that it’s the government’s responsibility to be the “spender of last resort.” Government should run a larger budget deficit during economic downturns and narrow the deficit during economic booms, they say. If implemented correctly, this approach will result in a smoother business cycle, they believe.

This makes economic sense. However, during a recession deficits automatically increase because the economy has built-in stabilizers. For example, during economic downturns incomes usually fall and as a result people pay less in personal income taxes. Profits also fall, which results in corporations paying less in corporate income taxes. And more people become eligible for benefits like welfare and unemployment payments during a recession, so government spending automatically goes up.

Obviously, these stabilizers will increase the budget deficit during a recession. Do you think they are being adequately factored into the recent budget deficit analysis? And do you think they will be sufficient in bringing the economy back to full employment?

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Posted by Wade at 6:27 PM | Comments (2) | TrackBack

April 2, 2009

Students of Global Finance

This week at the Chicago Fed, we held a high-school competition called Euro Challenge. Freshman and sophomores from area schools debated economic challenges facing Europe. You can read about it here from the Chicago Tribune. As they debated, I thought to myself (with great delight) how in the coming years there will be much attention/research dedicated to the impacts of globalized finance especially the interconnectedness of US and Europe’s financial systems.

My question to you all is pretty simple: do you think the forthcoming research will also lead us to re-examine the usefulness of our major indicators? For example, most textbooks talk up the virtues of CPI and different standard measures of inflation the Fed uses. Do you think there will be new ways to measure inflation – ways that may be more global in scope and may figure in household investments as well? Has this economic crisis illustrated that our measures of inflation are antiquated?

Post any articles or links you may have to this end…..

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Posted by Cindy at 9:00 PM | Comments (2) | TrackBack