Fiscal Indicators and the U.S. Business Cycle

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From the course by IE Business School

Business Opportunities and Risks in a Globalized Economy

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IE Business School

Business Opportunities and Risks in a Globalized Economy

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Course 3 of 3 in the Specialization Globalization, Economic Growth and Stability

This is the last of the three courses part of the Globalization, Economic Growth and Stability Specialization.¨Business Opportunities and Risks in a Globalized World¨ is the the 3rd and final course of the ¨Globalization, Economic Growth and Stability¨ Specialization taught by IE Business School's Professor Gayle Allard. This course is designed to help an investor, businessperson or economist approach macroeconomic, institutional and international data and derive information from the indicators that point to the types of opportunities and risks that they present. Students will gain practice by handling the data of some of the largest economies in the world –the United States, Japan, the European Union, China and India—and “reading the story” of their economies from their data, yielding surprisingly profound conclusions about their present and future. The course is the third in a series for the specialization but it is also a stand-alone course for anyone who wants practice in practical macroeconomics. This course includes 4 modules, each one deep-diving into the macroeconomic circumstances that have been brought up in the recent history of four key regions: the USA, Japan, Europe, and China and India. Students will analyze the ways in which international economies relate with one another, the benefits of trade and migration and economic development and how it occurs, among other themes. Professor Allard takes overarching macroeconomic theory and turns it into a practical tool for those interested in the opportunities and risks of investment and doing business in each of the four regions covered.

From the lesson

The USA: GDP, Inflation and Unemployment; Growth and Gaps: Reviewing the Basic Relationships.

The US economy is not only the world´s largest, but also one of the most free-market developed economies; and its data is abundant and excellent. It provides an ideal opportunity for students to review the basic macroeconomic and policy variables and relationships, and to identify these or detect their absence in the real world. In the process, they can make the first steps toward determining how “normal” or especially good situations provide business opportunities and how departures from the rules point up situations that are risky for businesses operating in that country.

Fiscal Indicators and the U.S. Business Cycle6:40

Does the U.S. Have a Public Debt Problem?5:21

Monetary Policy in the United States4:54

The U.S. Current Account and its Risks5:27

Ease of Doing Business and U.S. Inequality3:43

Risks and Opportunities for Investors in the U.S.4:27

Meet the Instructors

Gayle Allard
Professor
Economics

As we continue describing these different indicators for the US economy,

and kind of reviewing the content of understanding

economic policy making and trying to read some meaning out of them.

We're going to turn from what

the basic macroeconomic indicators were to government indicators.

So this first slide shows you government spending

and revenues as a percent of GDP for the US economy.

Now, to think about this,

remember that government spending will be all of its spending on all of its projects.

And here, on this particular chart,

I've put everything in state level,

local level, national level,

on social programs, on highways,

on subsidies, to oil companies,

on whatever it does, government spending.

Okay. And it's expressed here on this chart as a percent of GDP,

which is the best way to express it.

Because how can I compare,

what the United States spends on something with what Denmark spends on it.

Obviously Denmark is a much smaller economy, and so I would say,

well Denmark spends 200 million and

United States spends 20 billion and I would no nothing.

I have to say the United States spends as a percent of its economy,

35 percent and Denmark spends as a percent of its economy 50,

and then we can compare.

So here, these indicators are shown as a percent of US GDP.

And the top line is spending,

the bottom line is tax revenues.

And again, this is all income from all sources of taxation,

national, state, local level,

and they're all combined and then divided by GDP.

So you have two things you can actually compare here.

I think you notice a very striking thing immediately as you look at this picture which

is that revenues are never as high as spending.

In other words, United States is consistently year after year,

for every year in this chart,

and for many many years during a time series,

spending more than it takes in in taxes.

In other words, it has a fiscal deficit all the time.

The last time that we had a fiscal surplus,

was in the early 1990s.

So this is a characteristic of the United States.

Let's see if we can figure out where it comes from.

So this next chart explores for us whether,

the fact that the United States has a deficit all the time,

has something to do with its business cycle.

Now again, going back to the first course

in this specialization or to a macroeconomics course you might have taken,

remember that when an economy is in an inflationary gap,

its budget, its government budget should tend to balance and even go into surplus.

Because what happens when we go into an inflationary gap,

is we're growing faster,

we collect more in tax revenues because people spend more,

companies earn more, more people have jobs,

and we spend less on government programs because fewer people are

unemployed and other programs where

the government would need to help them through public services.

So in general, when the economy is doing well and when it goes into an inflationary gap,

the budget should go into surplus.

Okay. And then when we go into a recessionary gap,

the budget should follow it into deficit because as we go into that recessionary gap,

there are fewer jobs,

more people need unemployment benefits.

Public health, public education, whatever,

and the government is collecting less money because people are spending less,

they're earning less, corporations are earning less.

So generally, we would expect those lines to follow each other.

Here's my business cycle,

my inflationary gap and here's my budget surplus.

Now I go down into my recessionary gap,

and my budget goes into deficit.

Well if we look at this chart,

we can see that there is a relationship between the lines.

You can see the lines do follow one another.

So in good years, you see the budget comes closer to balance,

in bad years especially like

the recession in that long recessionary gap we observed earlier.

The budget will go into deficit and then as things improve,

it should move back up toward balance.

But once again notice,

that in the United States,

it's never in balance.

Okay. Even in those very good years that

large inflationary gap that we noticed before the crisis,

the budget continued in deficit.

It was a smaller deficit,

but it was still in deficit and,

of course, that deficit got very big during the recessionary gap.

During the recession and the recessionary gap the followed.

So, we have to say that the United States,

the reason for the US deficit is not the business cycle.

Because even when the business cycle is moving in its favor, the deficit persists.

Once again, by the way, on this chart,

you're seeing this deficit as a percent of GDP which is the way we should talk about it.

So exploring another reason why the United States might have a deficit is it because,

interest payments are so high that lots of money

goes out on paying interest on its national debt.

Could that be possible?

So on this graph,

I've portrayed for you,

first there's the deficit.

That's the one that's called government net lending as a percent of GDP.

And then there's the second line which is

government primary balance as a percentage of GDP.

Now the primary balance takes out interest payments.

So we might expect to see,

if the main reason the US has a deficit is paying interest on its debt,

we might expect the primary balance to be

positive even though the general balance is negative.

And again, we find here that that's not the case.

That in every year the United States has

a deficit even after we take out the interest payments.

So you notice the closest it gets to balance is actually in 2006,

just shortly before the crisis.

But it's still -the budget does not balance.

Even without the debt payments.

Simply taxes and government revenues are not in line with one another.

So we might ask ourselves where does this deficit come from.

What is it that the United States is spending so much money on that causes it to have

a chronic deficit year after

year across the business cycle even though interest payments aren't very high.

And on this final chart,

it's kind of an interesting picture of what different countries spend their money on.

Now, this work is done by the OECD which is one

of the sources I wanted to point you to in this course.

And what they're showing are social spending

in different countries which is spending on health,

on unemployment, on pensions,

all of the different social programs that we

have to protect the population in our countries.

So I've compared the United States with a number of

European countries and all through also with Australia and Canada.

And you can observe that social spending in the United States is really not very high.

The first area here is old age spending.

You can see many countries spending a lot more than we do,

and the United States is that last bar.

Then you can see that,

there is a survivor.

This is sort of social security pension,

spending it's lower, incapacity that would be disability,

that's also lower in the US.

Health, many of these countries spend

much more on public health than the United States does,

which is one of the lower numbers.

Now this would be public spending on health.

And family benefits, ALMP which is training for workers,

helping them to get into the market.

Unemployment benefits, housing and other.

You can see on all of them,

the United States has very little spending.

So the issue in the United States is not that we have a lot of spending although,

military spending is a large part of the budget.

It's that, we have taxes that are too low to support the level of spending that we want.

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