Question

Define the standardized employment budget. Analyze whether the actual budget or the standardized employment budget, is more helpful when discussing the long term health of the economy.

Answer 1

standardized budget A comparison of the government expenditures and tax collections that would occur if the economy operated at full employment throughout the year; the full-employment budget.

If the economy is producing less than its potential GDP, the standardized employment budget will show a smaller deficit than the actual budget.

When a country's economy is producing at a level that exceeds its potential GDP, the standardized employment budget will show a longer deficit than the actual budget.

The level of the federal budget surplus or deficit that would occur under current law if the economy operated at potential GDP. The standardized-budget surplus or deficit provides a measure of underlying fiscal policy by removing the influence of cyclical factors.

Each year, the nonpartisan Congressional Budget Office (CBO) calculates the standardized employment budget—that is, what the budget deficit or surplus would be if the economy were producing at potential GDP, where people who look for work were finding jobs in a reasonable period of time and businesses were making normal profits, with the result that both workers and businesses would be earning more and paying more taxes. In effect, the standardized employment deficit eliminates the impact of the automatic stabilizers.

During recessions, the automatic stabilizers tend to increase the budget deficit, so if the economy was instead at full employment, the deficit would be reduced. However, in the late 1990s the standardized employment budget surplus was lower than the actual budget surplus. The gap between the standardized budget deficit or surplus and the actual budget deficit or surplus shows the impact of the automatic stabilizers. More generally, the standardized budget figures allow you to see what the budget deficit would look like with the economy held constant—at its potential GDP level of output.