· The crowding-out model indicates that expansionary fiscal policy will lead to higher real interest rates and less private spending, particularly for investment. In an open economy, the higher interest rates will also lead to the following secondary effects: an inflow of capital, an appreciation of the dollar, and a reduction in net exports. The crowding-out theory implies that these secondary effects will largely offset the demand stimulus of expansionary fiscal policy.
· The new classical model stresses that financing government spending with debt rather than taxes changes the timing, but not the level, of taxes. According to this view, people will expect higher future taxes, which will lead to more saving and less private spending. This will tend to offset the expansionary effects of a deficit.
· Keynesian and non-Keynesian economists are now largely in agreement on the following three issues:
· (1)
Proper timing of discretionary fiscal policy is both difficult to achieve and crucially important,
· (2)
automatic stabilizers reduce the fluctuation of aggregate demand and help promote economic stability, and
· (3)
fiscal policy is much less potent than early Keynesians thought.
· When fiscal policy changes marginal tax rates, it influences aggregate supply by altering the attractiveness of productive activity relative to leisure and tax avoidance. Other things constant, lower marginal tax rates will increase aggregate supply. Supply-side economics should be viewed as a long-run strategy, not a countercyclical tool.
· Keynesian economists believe that increases in government spending financed by borrowing will increase aggregate demand and help promote recovery from a serious recession like that of 2008–2009. Non-Keynesian economists argue that Keynesian policies will lead to higher future interest rates and taxes, inefficient use of resources, and wasteful rent-seeking that will both hinder recovery and slow future economic growth.
· Tax cuts can generally begin to exert an impact on the economy more rapidly than spending increases. Further, rate reductions and permanent rate changes will exert a larger impact than tax rebates and temporary tax cuts.
· Political decision-makers responded to the 2008–2009 recession with large increases in both government spending and budget deficits. The large deficits pushed the federal debt to levels unseen since World War II.
· High levels of debt as a share of the economy pose a potential danger in a vicious cycle of rising interest costs, higher taxes, and slower economic growth. As long as worldwide interest rates remain low, the current levels of debt present in the United States are unlikely to result in serious problems. However, if interest rates rise in the future, the situation could change.