Fiscal Policy and Stimulus: Crash Course Economics #8

In which Jacob and Adriene teach you about the evils of fiscal policy and stimulus. Well, maybe the policies aren't evil, but there is an evil lair involved. In this episode we learn how government use taxes and spending influence the economy. Sometimes the government gives, and sometimes it takes. And the giving and the taking can have a profound effect on how economies behave.

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[СергейГалиуллин-пю]

*Main outtakes of this lesson*
1) _Recessionary gap_ - a situation wherein the real GDP is lower than potential GDP at the full employment level.
2) _Inflationary gap_ - the amount by which the actual gross domestic product (GDP) exceeds potential full-employment GDP.
3) _Macroeconomics_ - the study of the entire economy as a whole rather than individual markets.
4) _Fiscal policy_ - the way a government adjusts its spending levels and tax rates to monitor and influence a nation's economy.
a. _Expansionary Fiscal Policy_ - stimulates the economy during or anticipation of a business-cycle contraction.
b. _Contractionary Fiscal Policy_ - enacted by a government to reduce the money supply and ultimately the spending in a country.
c. Classical theories assumed that the economy will fix itself in a long run, and that government intervention will, at best, lead to unintended consequences and, at worst, cause massive inflation and debt.
5) _Deficit spending_ - the government spends more money than it collects in tax revenue.
a. _Crowding out_ - where increased public sector spending replaces, or drives down, private sector spending.
b. Keynesian economists maintain that _crowding out_ is only a problem if economy operates at full capacity, where all workers are employed and we're producing as much as we can.
6) _Austerity_ - raising taxes and cutting government spending to reduce debt. In crisis of 2008 was main policy of EU, which led to worse results than deficit spending policy in US.
7) _Multiplier effect_ - the initial increase in government spending of 100$ might turn out to be 175$ worth of actual spending in the economy.
a. When the economy is booming, multiplier is close to 1x.
b. When economy is in recession, the multiplier is around 2x.
c. Spending on infrastructure, and aid to state & local governments, also seems to have fairly high multiplier, about 1.5. But general cuts to payroll and income taxes seems to have a multiplier of about 1:. If the government cuts 100$ in taxes, the economy is going to grow by about 100$.

[bingobangobongo]

Sitting in quarantine trying to learn more about the economy... interesting how this video aged

[basemmattel]

I've learned more watching 11:53 minutes of this than the whole semester at my University.

[ryanowens]

Hey Crash Course, can we get a "why are we learning this" series? I'm a middle school science teacher and my kids always ask this question. Many times I am able to relate material to life but sometimes it's a struggle and I know it is for other teachers in science and other subjects as well. It would be fantastic to introduce a subject with a short video explaining different layers of importance of certain subjects as well as specific topics within them.

[feludaify]

At the beginning I was looking for the skip ad button...

[MK.]

I'm surprised you didn't make more use of that really expensive looking under ground lair set.

[koellekind]

As you said, Keynes also said that in inflation times - when the economy is running well - the government should increase taxes and decrease government spending. The problem is that many countries do not do that, so their debt rises and rises. That's one of the main problem many countries nowadays have in my opinion.

[carlaae]

i am watching your videos for over an hour now, which is literally saving me from failing my macroeconomics test tomorrow morning. you explain that stuff way better than some profs in university as your videos are perfect to understand mathemetically complicated theories! Greets from germany and lots of thanks for all the work :-)

[dantesdiscoinfernolol]

"Maybe it's about that thing you didn't have in sixth grade: *confidence* ."

Gurl, please. It's been years since then, and I STILL don't have that!

[SexualPotatoes]

GIVE US CRASH COURSE PHYSICS, DAMMIT!

..nice video, by the way.

[Robert-qqem]

I would love to see sources on Crash Course videos. Just a "we used these papers for sourcing" type deal. Allow some of us to dig deeper if we want.

[viktorlindh]

Thank you!

Spent over 30 hours reading through material for my pre-course and this channel explained it in a much easier way in under two hours.

[harunsuaidi]

"Maybe it's all about that thing you didn't have when you are in 6th grade: confidence."

I still don't have it by now.

[ergomate]

Now I can make informed decisions while making my opinions on government policy AND better manage my economy while playing Galactic Civilizations 2 and the like.

[CRPNW]

@CrashCourse, I would really appreciate if you guys had a recap/ summary of the main points we've learned at the end of all your videos like how Hank Green does on his SciShow videos.

Thanks for putting this together!

[crazyskullkid]

This helped me grasp this concept SO much easier. I was lost and thought I'd fail my essay. I am extremely grateful for this video and the rest of the economics series. Keep up the great work.

[mgs]

Loving this series so far, you guys are doing a great job, I was skeptical at first but keep it up guys!

[Loathomar]

The comparison to the US and EU policy did not take into account the massively different interest rates those countries where paying for debt that the effect that expansionary spending would have on the interest rates of new debt. Greece is the most extreme, with the interest of 10 year loans getting to over 40%. Meaning if had an expansionary spending where government debt spending was 10% of it's GDP, after 3 years interest on ONLY the new loans would be 12% of GDP. No one believes that Greece would ever get the growth that would allow them to pay that debt, so the debt rate only goes higher. US debt interest on the other hand was only ~2%, so the cost of expansionary spending was very low for the US. You can't cover everything, but that was a big key when comparing US and EU spending. Also, the main reason the US did not see much growth in spite of spend $800B, is that when government debt went from 70% of GDP to 100% of GDP, private sector debt when to ~260% of GDP to 200% GDP, causing a net loss of 30% of total debt over as a percent of GDP over ~6 years.

[ohheywhatsthat]

I normally would've found the idea of an Economics crash course being co-hosted a little ridiculous, but these two are just so dorky and engaging and adorable. Love the work!

[barrygormley]

The fallacy that government spending creates jobs is hardly older than the rebuttal to it. While it is true that even a broken window helps the glazier to get some cash, the person who pays the glazier would otherwise have spent that money elsewhere. This means that no new capital has been created. Only the direction of spending has been altered. The same principle applies on a national scale; as the money used to build a road or a bridge isn't conjured out of thin air, but is simply a redirection of where that money would have been spent. So not only have you not created jobs, but you may well have destroyed some. All this before we get to the problem of national debt and inflation.