Fiscal policy concepts and applications

Fiscal Policy

Federal Debt and Entitlement Programs

Much of the debate relative to federal debt and the spending practices within public services has been generated by the large costs registered by the Bush administration in its war against terrorism. With the realization of the magnitude of the federal deficit, to an extent that it would require the contributions of two more generations to be extinguished, the public debate relative to fiscal policies has gained momentum. Fiscal policies are developed and implemented by state authorities -- generally the governments within democratic countries or other forms of authority within non-democratic states.

The argued role of fiscal policies is that of supporting the fruitful development of the country's economic state, which then triggers social or technological advancements. In a more specific formulation, fiscal policy refers to the act of collecting money through taxes and then using it as a means of supporting the economic development of the respective country. Given this status quo, a question is being posed relative to the condition of the federal debt and the reforms which should be implemented to reform the entitlement programs. The following paragraphs strive to answer these questions by looking at two recent articles.

2. The Condition of the Federal Debt

In the context of a worried population which sees itself paying more taxes than ever and in a situation in which the public opinion regarding the sky high public debt worsens with every day, Randall Wray dares to take a new approach to the matter. He explains his angle through the long recognized concept of the composition fallacy. The idea basically states that just because one truth is valid for one element of the whole, it is not necessarily valid for the system itself. This idea can be applied to the understanding of federal deficits as follows:

(1) Within the household, the balance of payments and income has to be in a strict equilibrium, otherwise the family risks spending more than it makes, and reaching as such a situation of insolvency

(2) Despite the truth behind this realization, it cannot be extrapolated to the entire financial system of a country, which must in fact spend more in order to develop, ergo the fallacy in composition

In other words, Wray argues that the federal debt does not, in its essence, represent a problem, but a means for future development, improved living conditions, investments, jobs and so on. He bases his statement on a multitude of arguments. First, Wray argues the complexities of the macroeconomic system and the impossibility of extrapolating small scale rules to the principles which guide national and international affairs.

The best means of exemplifying why personal savings cannot be extrapolated to generate national savings is offered by a random individual, Mary, as named by the author, who decides to eat one less hamburger per week in order to save some money. Considering that she is consistent with her agenda and that no other forces influence her action, such as an unexpected pay cut or an unforeseen expenditure, she will achieve her savings desiderate. However, if all people decide to eat one less hamburger, a national problem would arise. Consider McDonald's as the retailer of the hamburgers the population cuts. The decision will materialize in a reduced demand for the company's products. This will in turn mean that the fast food giant has to cut costs, which could easily translate into downsizing operations. The final result is that people lose their jobs and that the living standards of the population decrease as a result of the initial savings.

With this simple example, Wray makes the point that savings hurt the economy and reduce its chances of development, meaning then that federal debt is in fact not a problem, but a necessity for sustained financial advancement. By increasing the consumption rate, we allocate more resources to investments which sustain the development of the country.

At a more specific level, the author argues that economic development is generally due to advancements within the private sector, but that these advancements are only possible due to investments in infrastructure, national safety and other elements paid for from the national budget. If these expenses were to decrease, the opportunities for economic growth would also decrease. Ergo, economic growth through the private sector is not possible without federal deficit. In his own words, "while it is commonly believed that continual budget deficits will bankrupt the nation, in reality, those budget deficits are the only way that our private sector can save and accumulate net financial wealth" (Wray, 2009).

3. The Reformation of Entitlement Programs

The article selected to answer the question relative to the future strategies that should be implemented to reform the entitlement programs is also written by Randall Wray, not for any other reason but for the curiosity of revealing his stand on the topic. This curiosity is raised by the innovative stand he takes relative to federal debt, making it as such intriguing to identify the author's views relative to other issues as well. This second article is entitled Social Security: Truth or Useful Fictions? And is written in a structured manner so that it is easy to follow. Similar to Teaching the Fallacy of Composition: The Federal Budget Deficit, is written with the proper and balanced usage of common and specific language, meaning that it appeals to a wider segment of the population, not just those specialized in economic and financial matters.

Wray commences by placing the entitlement services within the current context and arguing their importance. They must be perceived not as a plan or something to entirely rely upon, but as a "worst comes to worst" solution. Despite the current problems with health care coverage or social services, fact remains that private investment funds do not offer a solution. They merely represent a new scheme in favor of privatization, with the designated aim of increasing the revenues of those who administer the respective funds. Not only that they do not provide a transparent plan for the means by which the money is invested, they also do not offer protection against political changes. Therefore, the first thing not to be done about entitlement programs is the encouragement of privatization.

Then, there is the statement according to which not much can be done relative to social services, as they are pegged to the incomes from taxes. Additionally, since the demand for these types of services is not only irregular, but even increasing throughout the past few years (with the aging of the baby boomers for instance), financial constraints cannot be imposed to ensure a better regulation. In other words, one cannot implement reforms limiting the amounts of money spent on social services, meaning that financial restriction is not a suitable means of resolving the problems of the entitlement programs.