540 Miller Economics Today, Nineteenth Edition
Chapter 13 Fiscal Policy
Direct Offset of Government Grants
Private companies fund a considerable amount of scientific and engineering research. So does the
government. Although some of this research is conducted by people directly employed by government
agencies, the government also helps fund research by providing grants to researchers. Many such grants
provide dollar payments directly to researchers to fund all or part of their salaries and those of their
assistants. In addition, the government often helps pay for special equipment for various research
facilities.
The U.S. Government Finds an Unexpected Leak in Its Stream of Tax Revenues
Most federal tax revenues come from income taxes. Therefore, to predict its tax collections accurately, the
U.S. government must accurately forecast GDP. The government has never performed this task very well,
however, so its tax revenue projections are notoriously inaccurate. Another problem has emerged in the
2000s that caused it to overpredict its income tax collections. Under U.S. tax laws, workers pay taxes on
The Effects of the Bush Tax Cuts
In 2001, the Bush administration was faced with a recession and a budget surplus. Keynesian economic
policy suggested that the use of an expansionary fiscal policy could counter the recession. The Bush
administration chose to cut taxes because this was also a policy that it had campaigned on in 2000. The
Lecture Extender Examples 541
Where on the Laffer curve did the Bush administration think the economy was located? It believed that
Crowding-Out Effects during World War II
Most American history books point to World War II as a clear-cut example of beneficial expansionary fiscal
policy in action. The U.S. economy was pulled out of the Great Depression by enormous governmental
outlays for the war effort
rate from 1933 to 1941 was already higher than any other recorded peacetime period of the same length.
Moreover, the increase in military expenditures during World War II was not matched by a similar increase
Islam and Supply-Side Economics
Supply-side economics has a long history, dating back to at least the fourteenth century. The greatest of
medieval historians, Abu Zayd Abd-ar-Rahman Ibn Khaldun (1332 1406), included in his book, The
Muqaddimah (1377), an Islamic view of supply–
542 Miller Economics Today, Nineteenth Edition
Keynesian Fiscal Policy and the Financial Crisis of 2008
In the last quarter of 2008, a major financial crisis spread from the United States to the global economy.
The Federal Reserve created hundreds of billions of dollars and injected them into banks and the financial
system. It aggressively reduced the federal funds rate to less than 1 percent by early November. Nothing
much happened because the banks and other parts of the financial system simply held onto most of the money
that the Fed put into the economy because they perceived the risk of loans not being repaid was too great
to expand them by much. As evidence that monetary policy was ineffective, the actual federal funds rate
that banks charge each other fell as low as 0.22 percent by November, well below the official 1 percent
target rate. Politicians talked about tax cuts to stimulate the economy as well as increases in spending on