U.S. Fiscal Policy between 1991 and 2001

Natalia Smirnova, University of Connecticut
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Summary

Based on the graph showing the United States Federal government current receipts (from taxation) and current expenditures from 1991 till 2001, students analyze contractionary fiscal policy implementation.

Learning Goals

Data analysis, critical thinking, substantiated argumentation of ideas

Context for Use

● Is the activity appropriate for principles courses, intermediate courses, or selective elective courses?

Principles, Introductory Macroeconomics

● What prior student knowledge is required?

Understanding of fiscal policy; understanding of government budget; understanding of business cycles.

1. Prior to this activity, the reading homework could be given. The homework would require the reading about fiscal policy (taxation and government expenditures) and discussing the selection of one policy tool or the other depending on the phase of the business cycle.

Free Open Stax resource: https://cnx.org/contents/J_WQZJkO@9.2:l6B7Wl_K@6/Introduction-to-Government-Budgets-and-Fiscal-Policy

2. Prior to this activity, the handout on "Fiscal Policy from 1991 -2001" will be given as a supplemental reading (attached).

3. Prior to this activity, the FRED graph creation homework should be given. The handout about how to create the appropriate graph in FRED is attached.


● Are there class size limitations?
No

● How much time is needed for the activity? Does it extend across more than one class period?
50-minute class period.

Homework should be the creation of the graph in FRED. Handout is attached.

● Is this activity connected to another TBL activity? If so, please provide a link to that activity. For example, is this activity part of a group of activities within a single TBL module?
1. Could be a self-standing activity.
2. Could be connected to the activity "U.S. Fiscal Policy between 2002 and 2016".

Overview

This activity analyzes a graph showing the United States Federal government current receipts (from taxation) and current expenditures. Students review fiscal policy actions during 1991-2001 and the effect of the fiscal policy on business cycles. The activity calls upon students to recommend fiscal policy for 2001.

After the completion of this activity students will be able to:

1. Use FRED graphs to perform visual data comparisons.

2. Assess what fiscal policy was employed during the 1991-2001 expansion and what consequences resulted.

3. Recommend fiscal policy action based on the state of the economy.

Expected Student Learning Outcomes

After the completion of this activity students will be able to:

1. Use FRED graphs to perform visual data comparisons.

2. Assess how fiscal policy was implemented during the 1991-2001 expansion.

Information Given to Students

You are staff members of the Council of Economic Advisers to the President. Your role is to recommend policy responses to changing economic conditions. Observing the graph that you created during the homework exercise, determine why current receipts (from taxation) exceed current expenditures at the tail end of the 1991-2001 expansion.

President George W. Bush just won the 2000 election and is starting his term. You are to advise President G.W. Bush on the fiscal policy options. In order to create a policy memo, you need to consider each of the three policy options (below) and argue why one of them is the best policy to implement, in your view.

Directions: rank the policy options below from the most suitable to current economic conditions in 2001 to the least suitable by arguing the intended impact of this policy on overall economic activity.

Defend the best policy option to be implemented by President G.W. Bush.

Policy Options:

A. With the budget surplus looming, recommend the aggressive tax cuts.

B. With the budget surplus looming, recommend moderate tax cuts in combination with moderate expenditures cuts.

C. Recommend aggressive increase in expenditures for transportation and education due to accumulation of budget surplus.

Teaching Notes and Tips

● What prefatory remarks should set up the application exercise?

Need to explain fiscal policy: contractionary and expansionary;
Need to explain where government receipts are coming from (here: taxation) and what government expenditures are (provide examples of government expenditures).

● Does facilitating the team work require any special action?
No.

● What kinds of follow-up questions are recommended for facilitating the debriefing conversation among team reporters? In particular, how might the instructor get teams to evaluate which answer is the best, provide the analytical support for the team answers, identify what information would enable an economist to decide between alternative answers?

A. Begin the debriefing by having team reporters explain their (hopefully diverse) answers in words.

B. Ask other team reporters to support the team answer by referring to the data exhibit created for this exercise and explaining why they have chosen one or another policy option to be the best for this time period.

C. Ask the teams to answer the following question:

What would be the consequence for economic growth of the policy you are recommending?

● What points should be emphasized in the instructor's summary remarks to conclude the exercise?

There exists a relationship between the economic situation in a country and its government's fiscal position. Fiscal policy and its implementation have an impact on economic growth of a country.

Instructor could compare students' recommendations with actual policy outcomes and their economic effect during the Clinton Administration years.

Also, this would be interesting to point out the frequent conflict between desirable economic policy actions and actions taken for political reasons that might be contrary to recommended economic policy.

Assessment

Assessment:
Students should be able to state that during the 1991-2001 the economy was in expansion and therefore, government receipts were higher than expenditures. This situation prompted government to pursue the contractionary fiscal policy. Students should be able to explain the relationship between the economic expansion and the fiscal position; also, between economic expansion and contractionary fiscal policy.

To check for their understanding, instructor could post one or several essay questions:
1. What is the relationship between the economic expansion and federal government fiscal position? How this relationship promotes the implementation of fiscal policy?
2. Consider your state or local government. Would the fiscal policy options depend on the business cycle in this case?
3. What tools of fiscal policy are available to your state or local government?
4. Are there limitations for fiscal policy options at the state and local levels as compared to the federal level?

References and Resources

FRED: https://fred.stlouisfed.org/graph/?graph_id=612286

Asarta, Carlos and Roger Butters. 2018. Principles of Economics, 2nd Edition, McGraw-Hill. Instructor resources for this text contain ideas of teaching economics with FRED. I used these ideas to create this AE.