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Fiscal Policy and GDP

The idea that fiscal policy affects GDP is not new; it was largely responsible for the various New Deal programs enacted during the Great Depression of the 1930s. The projects undertaken during the 1930s, including numerous dams and public infrastructure activities, not only provided immediate employment (and taxes) to individuals who were unemployed, but provided investment in the nation's infrastructure that provided long-term economic stimulus.

However, the 1930s also saw the implementation of Social Security, a fiscal program that relies on current payroll taxes to pay pensions to retired workers. Godley and McCarthy suggest that Social Security and the related Medicare and Medicaid programs account for three-quarters of all federal outlays (p. 47), but fail to indicate how these payments boost GDP. They do suggest that such expenditures result in an increase in the fiscal stance.

It is not difficult to understand how the governmentasconsumer approach to economics can result in an increased GDP. Just as private industry can purchase goods and services and thus boost the GDP, so the government can do the same using funds collected from taxpayers. In some areas, the government is the single largest consumer of goods (military hardware and aircraft, for example), although private industry may sell to foreign governments as well as the federal


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Fiscal Policy and GDP. (1969, December 31). In Retrieved 05:20, October 23, 2014, from
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