The correlation between GDP, taxes, and debt.

This will be a lesson based on the Khan Academy economics course to explain how government tries to affect the economy. I say “try to,” because evidently government cannot fully control the economy as it might wish. This makes sense, when we want to compare government policies between, say Democrat vs. Republican leadership. There is no clearly defined border between the two. There is always a delay, number one, and number two: depending on the conditions (economic and otherwise) the implemented policies may or may not result in its intended purpose to the desired degree.

There are basically two kinds of policies: Monetary and Fiscal policy. Monetary policy deals with how much money to print by the “Central Bank”. In the USA that is a quasi independent institution. It is run by the government, but also gets input from private industry, such as banks. It is given the right to print money, but it is mostly electronic money. It buys “debt”. An interesting way of “lending money”. When someone buys bonds, he/she directly lends money to the government. This increases the amount of money.

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When the supply curve moves to the right, interest rate will drop, as seen in the graph by the little yellow line on the demand curve, while the supply of money increases as seen on the yellow line on the horizontal supply axis. This is like micro economics. When more money is available because of the shift in money demand, that shifts the aggregate demand on the macro economical side to the right, stimulating the economy, thus increasing GDP as can be seen in the graph below:

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This graph compares Price on the vertical axis to GDP on the horizontal axis. So, GDP can increase because more money is available.

Another way that aggregate supply can increase is through fiscal policy. Fiscal policy is the government directly demanding goods and services from the economy. It uses two sources to finance those demands: taxes and / or debt in the form of treasury bonds and other means. Say, the government issues more bonds, thus increasing the debt, but taxes remain the same. This will increase spending, having the same effect as the increase in money supply in the previous example.

This brings up an interesting difference between the Democrats and Republicans. Typically, but not always, the Republicans want to hold the line on taxes and at the same time not increase the debt. Democrats tend to want to increase social programs meaning increased taxes. The way I see it, is that the Republicans, for the most part, want to increase or stimulate the economy, at the appropriate time through printing more money (micro economics), while the Democrats want to stimulate more directly through tax increases (macro economics). Both parties want to promise the moon, so need more money to fulfill their promises, but since neither can get the full amount they want in their own way, debt on the fiscal side goes up, unchecked. I say “unchecked”, because debt keeps rising no matter which party is in the majority. That is just my simplistic opinion, looking at how our economy functions.