What Is Fiscal Policy?


Recently I wrote about a faux pas committed by several supporters of Ron Paul regarding their misunderstanding of economic Fiscal Policy and their subsequent berating of any economists who tried to explain to them that the everyday use of the term fiscal policy as understood by the general public is not the same as the technical economic usage. Investment, Communism, Competition, the Free Market, and several other economic terms have vastly different meanings in day-to-day use than in economic theory. But I’ll get into them some other time. For now, let’s talk Fiscal Policy:

Simply put, Fiscal Policy is any act by the government, including the president or Congress, that attempts to influence the economy. This differs from Monetary Policy, which is similar, but different, action taken by the Federal Reserve Bank to achieve the same ends.

Fiscal Policy is primarily carried out by altering tax rates, tax structures, and government spending (which is a major component of America’s annual GDP). Increased taxation generally gives the government increased spending money. When used appropriately, that money is to be reinvested into the economy, improving infrastructure, creating new jobs, giving small business owners and potential entrepreneurs needed aid to achieve their dreams. The New Deal, coupled with the increased military production/manufacturing and the lack of males available for employment (extremely low unemployment rates for those women in the workforce) due to World War 2, stimulated our economic growth like never before or since.

FDR’s actions are an example of Fiscal Policy at its best–he used it appropriately, he used it to benefit all Americans and pull us out of the Depression, and, most importantly, his incredible income tax hikes were a temporary and necessary drastic measure to keep our nation from sliding deeper into poverty and stagnation.

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