Fiscal policy actions

0:01- [Instructor] In this video, we're gonna talk about things that the government might try to do in order to help stimulate the economy. And so when we're talking about fiscal policy actions, we're thinking about the government. So if we're talking about setting interest rates or the money supply, that's a central bank, that's monetary policy.

0:19Well, if we're talking about whether it's the government spending money and trying to put money into people's hands or change tax policy, that is fiscal policy actions. Now, you might be wondering, who are these three characters that I had an AI generate? Well, on the left here you have Adam Smith, and let me do that in a more respectable color.

0:40So this is Adam Smith, who was an 18th century Scottish economist, famous for writing "The Wealth of Nations" in 1776. Considered the father of classical economics, that a lot of what we believe about free markets and people, for the most part, acting in their own self-interest oftentimes being good for everyone and markets and market set pricing, actually determining how resources are allocated to be maybe the best way of doing it.

1:13That all comes from Adam Smith. Now Adam Smith, he talked a lot about things like the invisible hand of the market, that you shouldn't need a central planner in there. And you could imagine he didn't believe that the government should play a huge role in trying to determine how the economy unfolds.

1:32Now, you fast forward and there's many booms and busts in many economies, including the United States, but especially if you fast forward to 1929. You have a stock market bust in the United States, and then we go into the Great Depression. And generally speaking, there are targets that we would like in an economy.

1:53In other videos, we talk about, "Hey, maybe we have about a 2% inflation. Seems just about right." You don't want higher than that. Then you can have hyperinflation and it can become destructive, or not even hyper. Even if you have three, four, 5% inflation, it can become destructive.

2:08And if you have much lower than this, it can be the sign of a slowing economy. And if you have negative inflation or deflation, that can be really bad for the economy. So 2% inflation is what people often talk about. And people often talk about roughly 4% unemployment as being full employment.

2:26Now you might say, why 4% and not 0%? Well, there's always people who are switching jobs and looking for jobs, so there's always going to be some friction in the market. And so economists has generally thought about three and a half to say four and a half percent unemployment as roughly full employment.

2:43So this is what a lot of folks would consider the Goldilocks zone. And in 1929 going into the 1930s, we fell well out of that. In particular, unemployment skyrocketed. It went to double digits. People were really hurting. And some people believed, "Hey, we should just let the market sort it all out," like Adam Smith said.

3:05But as things went on and on and people were suffering, other people started to argue that, "Hey, maybe the government should take an active role." And a lot of that was inspired by this gentleman in front, who is John Maynard Keynes. And I used to mispronounce it as Keynes 'cause it looks like that, but it's Keynes.

3:24John Maynard Keynes, who was a very prominent British economist, roughly a hundred years ago. And he argued that the government had an active role in the economy to smooth out the ups and downs that might happen, so that when we are in these downs, that the government could actively spend more and potentially tax less in order to stimulate things back towards an upward trajectory.

3:48And Franklin Delano Roosevelt, who was elected president in 1932 and took office in 1933, took what Keynes had to say very seriously. His predecessor, Herbert Hoover, was a little bit more in the camp of Adam Smith, and it wasn't having a lot of effect. So FDR started aggressively spending government money, oftentimes money that the government didn't have, borrowing money in order to spend it in order to drive a recovery.

4:15Now, people today still debate to what degree that Keynesian economics should drive government policy. People on the left tend to argue that, "Hey, it's good if you stimulate the economy." Maybe by spending more, putting more money in people's pockets. People on the right either might be a little bit more on the side of Adam Smith, or they might favor the side of Keynesian policy that says, "Hey, maybe we should tax less, put more money into people's and corporations pockets that way."

4:43And then that could stimulate the economy. Corporations will have higher profits, they'll be in a better chance to hire. People will have more money in their pocket and they'll be in a better position to spend. But generally speaking these days, politicians of both sides of the spectrum really are invoking Keynes in some way because they do think that the government, not just the federal, not just the central bank, has a role in fiscal policy in order to hopefully smooth out these bumps in the economy.