In Alan AuerbachÆs article ôIs There A Role for Discretionary Fiscal Policy?ö (Auerbach, 2002), the complex relationship between U.S. fiscal policy and GDP is examined in detail. One of AuerbachÆs points in the article is that ôàthe full-employment surplus has fallen in response to a rise in the Gross Domestic Product (GDP) gap, consistent with the use of discretionary, countercyclical fiscal policy.ö (Auerbach, p. 3, 2002) Although Auerbach feels that this relationship is weak and not statistically significant, his ensuing explanation shows that it is important to understanding how fiscal policy and GDP impact one another. He goes on to discuss other determinants of fiscal policy and points out that U.S. fiscal policy over the years has a record of yielding higher budget surpluses whenever there have been increased levels of national debt. ôWhen the lagged budget surplus is added to the regression, we end up with a statistically significant relationship where the higher the lagged budget surplus, the higher the fall in current full-employment surplus.ö (Auerbach, 2002, p. 5).
According to Auerbach, the U.S. fiscal policy has been responsive to both cyclical and budgetary conditions. Table 3, Determinants of Discretionary Spending, ôrelates actual year-to-year changes in discretionary spending to the prior yearÆs GDP gap and budget surplus, all relative to full-employment GDPö in contrast to just considering changes in forecast spending of a discretionary nature. The table shows that the GDP gap was insignificant, and Auerbach concludes that this indicates a weak relationship, at least at the annual level. He further states that ôthe magnitude and timing of discretionary responses is only part of the story concerning the efficacy of fiscal policy as a tool for macroeconomic stabilization.ö (Auerbach, 2002, p. 10). He goes on to discuss automatic stabilizers, federal spending and federal tax revenues in particular...