Running Head: FISCAL POLICY

Fiscal Policy Paper
ECO/372
September 1, 2012

The team has learned that deficits, debts, and surpluses are accounting measures. There are many things to consider as important whether a budget is in surplus or deficit. The true importance is the health of the economy. The state of the economy needs to consider when to make a decision about whether deficits or surpluses are beneficial for the United States. Taxpayers have implemented how their money is in use when paying off deficits and how surpluses are in use to give back to the country. Debates of how taxpayers should use their money extremely important on how it affects deficits, debts, and surpluses. One debate is about how concerned an individual should be about deficits involves the future of the Social Security System and Medicare users. Unemployed individuals depend on these types of benefits and the number of users affects the accounting measures. To discuss the United States deficit, here are some examples of opinion from a University of Phoenix student. In addition, part of our discussion will illustrate the United States financial reputation on an international level. This will include an example of importer and exporter. Our team will give an example of an (importer) an Italian clothing company and for an (exporter) a domestic automotive manufacturing. Understanding accounting measures involves the health of the economy, which can be determined by the measure of the gross domestic product (GDP).
When the United States is facing a deficit or debt the taxpayers can be hurt. A deficit or debt in the budget can cause an increase in taxes that will result in the worker bringing home less money on his or her paychecks. A taxpayer can also lose special programs that they have been paying into such as Medicare, Medicaid, Social Security, and Defense programs to keep us safe. During a surplus the taxpayers can receive a refund from the government. With this refund a tax payer could have more money to save, spend, or invest. With surplus taxpayers could also receive lower interest rates. Acquiring lower interest rates allows an individual to purchase items such as a home, car, or a family vacation. Businesses would be able to expand their company and have potential to hire more workers.
In the United States, the Social Security Administration operates a fund that pays benefits to eligible retired and disabled persons or surviving children or spouses of such persons. This fund is the Social Security Trust Fund. There are two sectors of the Social Security Trust Fund and two types of payable benefits; the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds. These funds hold federal government debt obligations known as social security benefits. The Old-Age and Survivors Insurance (OASI) Trust Fund is the larger of the two types of funds, which both fund types hold special interest bearing government securities in a trust that include purchases with surplus payroll tax revenues (www.ssa.gov).
These trust funds are considered to run surpluses, which primarily causes the system to operate “pay as they go.” This means that the benefits are issued on a monthly basis and are derived from the payroll taxes, which currently are being deducted from the paychecks of the present workforce. Also because the current deducted payroll taxes used to supply to the benefits is more than the payout; there is a surplus. The surpluses are given to the U.S. Treasury (and thus become part of the general federal budget) in exchange for special U.S. government securities, which are deposited into the trust funds (www.ssa.gov). In the same respect in the event more benefits are paid out than the amount deducted payroll taxes used to fund the benefits; the program will begin to run deficit. If the trust funds begin running deficits, the Social Security Administration has the ability to redeem the securities and use those funds to cover the deficit.
According to the projections of the Social Security Administration, the Trust Fund will continue to show net growth until 2022 because the interest generated by its bonds and the revenue from payroll taxes exceeds the amount needed to pay benefits. After 2022, without increases in Social Security taxes or cuts in benefits, the Fund is projected to decrease each year until being fully exhausted in 2033. At this point, if legislative action is not taken, the benefits would be reduced (www.ssa.gov).
Government cannot manage the employment or economic factors as well as the American people think. If that were the case there would not be a recessions as everything would be predictable and lead to no unemployment. Based on a current review democrats mention cutting jobs in a weak economy may be unwise; however, republicans say deficit and spending cuts control are a main point to economic growth.
The deficit affects the average University of Phoenix student in that government spending has been cut to help offset the deficit. Financial aid that students were receiving is no longer available. The results are that many students may have to drop out of school because they cannot afford to continue their education. If there is a surplus in the country, the students would benefit from a workforce looking for new graduates for employment. The export on the surplus would create the demand from other countries, thus providing jobs. The national debt affects the average student if they have bonds or securities from the government. The government issues those bonds as a way to borrow money from the people of the country. In time, the government must pay back the bond with interest. If the government continues to have debt issues, they may not be able to pay the bonds back. A student who would have this bond would not receive the money that he or she should receive (Colander, 2010).
The international financial reputation of the United States has different views by different countries, depending on the situation. If the Unites States has a deficit, the other countries would sell products this country. Other countries would want the income they would be receiving from the United States purchasing products from their supplies. However, other countries may view the United States’ economy as weak because they are not exporting as many goods as they are importing. If the United States has a surplus, other countries would be purchasing products from this country. The other countries may see that the United States has a strong economy, but they may be unhappy that the Unites States is making money off their country. The national debt of the United States would make countries less likely to purchase securities from the United States. Foreign companies may see the debt as a chance to invest in the United States securities for a low cost, or they may have worries that the United States will not pay back the securities. The reputation of the United States could have either a positive or negative view by other countries in any situation (Colander, 2010).
Exporters such as the United States auto manufacturers are affected in many ways when the economy is running at a deficit or surplus. The country’s national debt also affects the business of our exporters, just as our balance of trade can affect all three. The balance of trade is how the ratios of the country’s export and import and how those ratios balance.
Using the example of a United States auto manufacturer, when the economy is running on a deficit the Federal Reserve sells treasury bonds to finance the deficit. When treasury bonds are sold the money supply decreases, and this can result in higher interest rates with lenders and a decrease in the value of the dollar in the exchange rate. Each of these would affect a domestic auto manufacturer because higher interest rates can deter domestic buyers from making large purchases, such as vehicles and a decrease in the value of the dollar can decrease the value of their merchandise in other countries.
On the other hand when the country is running on a surplus the Federal Reserve buys treasury bonds, which results in a decrease in interest rates and an increase of the money supply. This can benefit the auto manufacturer by decreasing lenders interest rates and increasing the value of the dollar. Another benefit to exporters during a surplus is normally a reduction in taxes which can allow them to become more competitive with other countries manufacturers.
The national debt can also affect exporters, such as an auto manufacturer but more so the exports can make a difference in the national debt. According to Colander, D.C. (2010), “Most of the decrease in the debt-to-GDP ratio in U.S. history occurred through growth in GDP.” So historically if the GDP increases the national debt decreases. When the U.S. is running a deficit the Italian clothing company (importer) has to be willing to loan the U.S. the money to import their clothing. The Italian clothing company may be faced with tariff’s that will raise their taxes for importing goods and services to the U.S.
A trade surplus indicates that there is more demand for the exports of a country than there is demand for foreign products and services (Wise Geek, 2012). A surplus will result in less clothing needed from another country. During a surplus the U.S. will manufacture and supply more clothing to the economy therefore, the Italian clothing company will not be in high demand for their goods and services.
The deficits and surpluses in the United States will determine the amount of debt. However, most economists consider the absolute figures of deficits and debt relative to GDP. Our text defines GDP as “the total market value of all final goods and services produced in an economy in a one-year period,” (Colander, Ch 8, pg. 183). Economists prefer the relative to GDP measure because it better measures the government’s ability to handle the deficit; a nation’s ability to pay off a debt depends on its productive capacity. The function of GDP servers to the government as income does for an individual. GDP provides a measure of how much debt and how large a deficit, government can handle. Remember that a surplus occurs when a country is exporting more goods and services than they are importing and a deficit occurs when importing supersedes the number of exporting. Importing more goods and services will cause a deficit for our nation, which will cause an increase of GDP. Exporting more goods and services will cause a surplus, which causes a decrease of GDP.
In conclusion our Team has learned deficits, debts and surpluses are accounting measures. We have learned that “ tax payers can receive a refund, Social Security Administration pays benefits to eligible retired and disabled individuals, Government cannot manage the employment or economic factors, which can lead to unemployment, deficit affects the average University of Phoenix student in government spending, which leads to a student dropping out of school because they cannot afford their education and the United States financial reputation could have a positive and negative view by other countries involving any situation. The domestic automotive manufacturing (exporter) in purchasing vehicles can lead to higher interest rates, but have lower taxes. The Italian clothing company (importer) can be faced with high taxes leading to less clothing for the economy and finally the GDP, which measures how much debt and how large a deficit (Colander, 2010).”

References:
Colander, D. C. (2010). Macroeconomics (8th ed.). Boston, MA: McGraw-Hill/Irwin.
Social Security Administration-Summary of the 2012 Annual Reports-Retrieved April 2012.http://www.ssa.gov/pressoffice/pr/trustee12-pr.html
Wise Geek. 2012. What is a Surplus? Retrieved from: http://www.wisegeek.com/what-is-a-trade-surplus.htm