Fiscal Policy Today


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The Life-Cycle Hypothesis
Permanent-Income Hypothesis

The story of the grasshopper and the ant contrasts two ways of making decisions over time. The ant way is captured in the permanent-income hypothesis, which economists says is the rational way for people to behave. The grasshopper way is to focus only on the present and to ignore the future. Economists tend to think that this approach to spending is irrational and have worried about it for at least a century. The original Aesop's version (found here) is only a few lines long. The Disney cartoon version stretches it to over 8 minutes and gives it a happy ending. There is still a moral to the story, but not the same as the original.

Do you think the Disney version improves on the original story, or does it miss the point of the original? Justify your answer.

Here is the song from this clip sung by Shirley Temple. In the 1930s movies featuring the rich were very popular.

 Here is Walt Disney giving some background info.

A Dam Analogy

In this clip, Milton Friedman compares incentives when you spend money on yourself and when you spend other people's money on other people. Can you draw the matrix he is suggesting and explain how he see the incentives in each cell?

Lagging Doubts Crowding Out

A short clip with some cute graphics that explains why crowding out and policy lags reduce the effectiveness of fiscal policy.

This clip explains the broken-window fallacy, which is an argument from Frédéric Bastiat, a French economic writer of the 19th century. The original point that Bastiat was trying to make is that when you ignore opportunity costs, you end up arguing for ridiculous things, such as breaking windows improves society. Here his argument id being used to explain the importance of crowding out when discussing fiscal policy. The clip shows that the crowding-out argument is based on the concept of opportunity costs.

These links were checked on August 5, 2010.
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Copyright Robert Schenk