Question

The Fiscal Policy is the use of the Federal Budget to regulate the economy. What are discretionary spending and automatic stabilizers? When was it first used? What are problems with using the budget to regulate the economy?

Answer 1

Fiscal policies include discretionary spending and automatic stabilizers. Discretionary spending arises when the Federal government passes a new law to explicitly change rates of tax or levels of spending. The tax changes and levels of spending may also occur automatically through non-discretionary spending because of the automatic stabilizers, that are programs which are already in place, and therefore does not require any act from Congress. President Harry S. Truman after World War II introduced automatic stabilizers; and U.S. discretionary spending started in 1963

The main problem of automatic stabilization policy is that it doesn't work when inflation is caused by causes other than those that impact the aggregate demand. On the other hand, discretionary fiscal policies can address economic issues that are not tied to the aggregate demand. Moreover automatic stabilizers are not an option in less-developed nations as they must have well-developed social welfare and tax system in place. The main problem for discretionary fiscal policy arises due to the difficulties of long time lag due to the explaining the politicians how countercyclical fiscal policy that runs against the tide of the business cycle would perform.