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KNOW GOOD THINGS – Fiscal Policy Overview

July 3, 2017

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Howdy, gang! Now that we’ve set the stage for what I plan on focusing on, as well as what I expect from my readers, let’s begin constructing a platform upon which we can firmly stand (regarding our ability to understand and apply macroeconomic analysis so we can add it to our daily trading routines). Obviously, in order to build a solid platform, we’ll need to build a solid foundation.

As I mentioned in last week’s blog, there are some people who want the social science of economics to be tantamount to physics as it applies to the physical sciences. I have always been infatuated by the study of economics, but I’m not so blinded by my personal interests as to pretend that it’s something it’s not. They are two completely different things. Apples and oranges. Steak and broccoli.

This week I want to focus on the various economic “schools of thought,” which is to say that I want to discuss the large-scale forces that determine how the macroeconomy actually works. I mentioned a few things last week that I’d like to start with and explain in a bit more detail.

First of all, there is a difference between fiscal policy and monetary policy. Most people today seem to use these terms interchangeably, but there are definite differences between them that warrant an explanation. Fiscal policy has to do with the way government uses public spending and taxation in order to influence and/or manipulate the country’s economic performance. For example, the government may choose to tax more and invest in things like military upgrades or public works (building roads, bridges, schools, etc…) to create employment and artificially adjust salaries. Just as the government can decide to increase taxes and spending, they can also decide to do the opposite as a means to reach an economic goal. They can choose to reduce public spending in order to reduce taxation to allow individual citizens to have access to more of their earned incomes…to bring home more of their paycheck and choose for themselves how to spend their money. It should be noted that fiscal policy can be a federal, state, and even a county or city strategy. Some of you may know exactly what I’m referring to especially if you live in Manhattan, Los Angeles, or another city known to be expensive to live in.

We tend to think more about the federal government when it comes to financial decisions such as taxes and spending because it affects us as all…across the board. Fiscal policy is still a huge issue in the individual states and there seems to be a wide ranging difference between the states, but that’s something voters in individual states decide upon. We can see the differences between state fiscal policies kind of like spectators at a sporting event. The difference between the fiscal policies of California and Indiana, for example, are rather obvious and somewhat dramatic! The beauty of living as a citizen in the United States is that if we don’t like how things are developing in the state we live in then we can always move to a different state! We can’t, however, make the same type of decision regarding federal fiscal policy and it’s because of this that we tend to focus more on federal policies than state policies.

Bottom line is that fiscal policy can be influenced by the citizenry. The scariest thing in a politician’s mind is the thought of being voted OUT of office so if he or she feels that supporting an increase of federal spending is something that his/her constituents support then guess what your representative or senator will be voting for? This is not same when it comes to monetary policy, which we’ll take a look at next week. There’s a wide gulf between the citizenry and the people who set monetary policy! In the meantime, I hope these blog entries help create a cleaner picture of economics and policy.
Be good. Do good. Know good.

Columbus, Indiana

One Reply to “KNOW GOOD THINGS – Fiscal Policy Overview”

  1. MichaelKleinhenz says:

    Hoping that everyone is enjoying the new concept of this blog. I’m trying to build off of each submission…step by step…until we can get into current data.
    If anyone has any helpful tidbits or requests then please let me know!
    Be good…do good…know good!
    Mike (aka, Kleiny)

Comments are closed.

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