Teaching fiscal policy to undergraduates: A new paradigm for the 21st century

Following Paul Samuelson (1948), every principles of economics textbook has a section on fiscal policy, which has evolved over time. A conventional assertion is that output and employment move together, so when fiscal policy fully stabilizes the economy, output and employment return to pre-recession levels. However, for the last four recessions, rebounds in output are accompanied by much slower employment recoveries-jobless recoveries. Economists attribute this to the skill-biased nature of technologies fostering the 4th Industrial Revolution. Conventional fiscal policy analysis presented in leading introductory economics textbooks does not address this situation adequately. This article's authors believe it is time to update the teaching of fiscal policy to reflect this 21st-century reality. Using the introductory models, they explain how fiscal policy can foster jobless recoveries.