Comprehensive Notes on Government Spending and Fiscal Policy

Government spending is always part of the budget, especially concerning geopolitics and wars.
Fiscal policy helped to alleviate the Great Depression, although some argue war spending was the primary driver.

The economy fluctuates between growth (positive GDP growth) and recession (negative GDP growth).
Real GDP per capita is used to measure economic growth, growth rate of real GDP per capita indicates a growth cycle.

Besides GDP, other indicators of a healthy economy include unemployment, inflation, number of graduates, and labor force participation.
Institutions are generally stable and change slowly over time and are considered more long term.

Procyclical: Variables positively correlated with GDP (e.g., employment).
Countercyclical: Variables negatively correlated with GDP (e.g., unemployment).

Aims to shift aggregate demand countercyclically, pushing it positively during recessions when GDP is negative.
Intended to lean against the wind, cooling down the economy during high growth to prevent inflation and stimulating it during downturns.
Military spending is generally not tied to the GDP cycle but rather to geopolitical events.
World War II acted as a fiscal stimulus, with increased spending justified by the war, higher taxes (including income taxes), and greater labor force participation (especially by women).

Fiscal policy has temporary effects.
A negative shock shifts the aggregate demand (AD) curve, leading to a short-run equilibrium.
Government intervention aims to shift the AD curve back up to restore the long-run equilibrium.

The multiplier effect is amplified when there are many unemployed resources, enabling government spending to have a greater impact.
The effect of the spending is represented by the equation: $"Multiplier Effect" = \frac{\Delta Y}{\Delta G}$ , where $"\Delta Y"$ is the change in income and $"\Delta G"$ is the change in government spending.

The federal budget involves government financing through taxes and loans (primarily US Treasury bills or T-bills).
The difference between government spending and revenue is the deficit, and the accumulation of deficits leads to debt.

In February 2023, the government collected approximately $4.7 trillion$ .
Individual income taxes make up almost half of the tax revenue, almost $14,000$ per citizen.
Social Security and payroll taxes constitute another significant portion, with labor taxes (including both) accounting for 84% of revenue.
Capital tax accounted for about 11% of tax revenues, while tariffs made up a very small percentage (4% within other tax revenues).
Excise taxes are taxes on specific goods like tobacco and alcohol.

The US income tax system is progressive, meaning higher income earners pay increasing marginal tax rates.
Initial income (e.g., the first $22,000) is not taxed and may even qualify for a tax credit.
However, wealthy individuals, such as CEOs, may structure their income to be primarily capital gains (through company shares) rather than labor income to reduce their tax burden.
Capital gains are taxed at a much lower rate, and if the shares are not sold, they can be used as collateral for loans, allowing the wealthy to finance spending without incurring taxes.

In 1960, the highest income tax rate was 91%, significantly higher than the current rate of around 37%.
Before income tax, tariffs were the primary source of government revenue because they were easier to implement and enforce.
Tax deductions for items like child credits reduce the tax base and allow individuals to pay lower tax rates.
Capital gains tax rates range from 0% for low incomes to 15-20% for higher incomes, much lower than income tax rates.

Designed to pay retired workers and is funded by current workers.
It is structured as a transfer and is thus excluded from GDP calculations to avoid double counting.
The Social Security tax is 6.2% paid by both the employer and employee (12.4% total), applicable up to the first $160,000 of income, making it a regressive tax.

Medicare tax is 1.485%, used to provide healthcare insurance for people 65 and older, the disabled, and others; it's also a transfer.
Economically, payroll taxes on labor income are ultimately paid by the worker through lower wages, regardless of whether the employer or employee nominally pays it.

The actual economic burden of a tax depends on the elasticity of labor supply and demand.
If labor demand is elastic and labor supply is inelastic, workers pay more of the tax burden.
If labor supply is elastic and demand is inelastic, firms pay more. Most research suggests the former scenario.
Understanding elasticity is crucial for understanding who ultimately pays a tax, whether in the labor market or any other market, including tariffs.

Paid on profits, and its impact on capital versus labor depends on elasticity.
Some argue that corporate income taxes can also affect labor demand if firms reduce investment due to these taxes.

In 2023, 25.1% of government spending went to Social Security, 14% to Medicare, and 13% to defense, with relatively small amounts spent on unemployment and welfare.
Government spending as a percentage of GDP has been relatively constant at 15-25%, with shifts in individual components.
Military spending has decreased since the end of the Cold War, while Social Security and health care spending have increased.

The pay-as-you-go system means current workers fund current retirees.
An aging population has increased the burden on Social Security, which can be addressed by increasing the retirement age or reducing benefits.

National debt held by the public excludes lending within US agencies.
It includes individuals, corporations, local governments, and foreign governments.
This was $25 trillion, approximately equal to the size of the US economy (100% debt-to-GDP ratio).

The US government can sustain such high debt levels because lenders believe it will not default and because the US dollar is the world's reserve currency.
Continued lending depends on faith in future US economic growth and innovation.

Higher debt levels lead to increased spending on interest payments.
In 2023, the federal government paid around $625 billion in interest, approximately 13.3% of government revenues.
The US still enjoys lower interest rates on its debt compared to other countries, reflecting trust in its institutions.

Government spending as a percentage of GDP in the US is relatively low compared to other countries, despite its ability to borrow at low rates.