[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

would be expected to produce). To counteract these forces, President Lyndon Johnson
imposed a 10 percent income tax surcharge in 1968; the hope was that this tax
increase would cause households to scale back their consumption spending, thereby
helping to offset the expansion in demand caused by the increased government
spending. Unfortunately, the policy did not have the full effect that its designers
had sought—because the tax surcharge was temporary, lasting only one year, most
households had little reason to significantly change their behavior.
In the United States, discretionary fiscal policy is usually viewed as very slow
to respond. As is discussed in greater detail at the end of this chapter, there are
inevitably delays both in recognizing a problem and—more significantly—in drafting
and passing legislation to address it. Congress rarely works swiftly. As a result
of these lags in implementation, at least for the United States, fiscal policy operates
mainly through automatic stabilizers in helping to stabilize the economy. When the
economy enters a recession, tax revenues decline automatically as incomes fall. And
as incomes and employment levels fall, some government expenditure programs,
such as unemployment insurance, automatically increase. These responses help
stabilize the disposable income and consumption spending of households.
Using Discretionary Fiscal Policy to Combat a Recession When
the economy goes into a recession, the role of fiscal policy is usually hotly debated;
despite their practical difficulties as tools to fine-tune the economy, discretionary
policy actions are frequently proposed. During 1990 and 1991, the U.S. economy was
caught in recession, and “It’s the economy, stupid” was one of the most memorable
lines from Bill Clinton’s successful 1992 campaign against the incumbent president,
George H. W. Bush. Clinton argued for a more active fiscal response to help end the
recession, although by the time he took office, the economy was already expanding
and the recession was clearly over.
In 2001, soon after President George W. Bush took office, the U.S. economy
entered a recession, and the president used the emerging signs of an economic slowdown
to push a tax cut through Congress. He argued that an expansionary fiscal
policy was needed because of the recession. We can use the ADI framework to
analyze the impact of a fiscal expansion during a recession.
Internet Connection
THE ECONOMIC REPORT OF THE PRESIDENT
Every February, the president’s Council of Economic Advisors
issues the Economic Report of the President. This report
discusses the state of the economy and developments in
fiscal policy. As well as providing a wealth of data on the
economy, each chapter of the report deals with a current
policy debate. The latest report can be found at www.gpo
access.gov/eop/index.html.
732 ∂ CHAPTER 33 THE ROLE OF MACROECONOMIC POLICY