Fiscal Policy Essays

In the search for an effective fiscal policy

The real GDP growth rate has been the consistent priority of every nation’s government as it essentially determines the country’s current economic health. Whether a country can maintain a desirable GDP growth rate or not depends simultaneously on many factors within the economy itself such as CPI, inflation rate, unemployment rate, etc. Therefore, the role of every government is to oversee the current situation of the economy and control it accordingly using its fiscal policy tool, in which the government controls tax policy and government spending. The concept of fiscal policy seems simple to most people under their own preferences as they insularly think that decreasing government spending and reducing tax rate are good for the economy. However, economists and economic students are more aware of the submerged part of the fiscal policy iceberg which reveals the interrelationship and tradeoff between many GDP growth rate’s determinants. This paper will discuss those factors that economists and policymakers have always debated over when trying to compose an effective fiscal policy for a country, specifically the United State. The global economy has just squeezed through a large recession during 2007-2008, when every single economy suffered the chain effects of the failure of many enormous financial institutes ignited by the collapse of the AIG corp. The financial crisis has left behind it a devastated aftermath with many financial firms merely survived which consequently froze the credit system, and raised the unemployment rate to as high as 10.1% in Oct 2010. Here comes a recession. The situation was so severe that it called for both immediate interventions from fiscal policy and monetary policy. Ironically, the significantly lowered interest rate, which is the best tool of the Federal Reserve, fell short in helping the economy since most of the banks were still in the fear of loan defaults that made them unwilling or merely unable to make loans to borrowers even when the Central Bank had already offered them money at the interest rate of approximately zero (Economic Stimulus, NYT, Dec 15, 2010). Therefore, the next possible life-saver of the economy was a large expansionary fiscal policy. In response to the stagnated situation of the economy, on Fed 11 2009, the Obama’s legislators announced the stimulus package called the American Recovery and Reinvestment Act including “$507 billion in spending programs and $282 billion in tax relief” (Economic Stimulus, NYT, Dec 15, 2010) after a long, pressing debate about what size and shape the stimulus package should take. The package was clearly one of the largest efforts of the U.S government to help the economy recover. It increased the aggregate demand directly through raising government spending, and indirectly through increasing households’ disposable incomes by cutting tax rates, all of which would eventually hook the economy up from the edge of falling deeper into depression. Consequently, the GDP growth rate revived to as high as 5% in the fourth quarter of 2009, compared to the trough of its falling at -6.8% one year earlier (The Stimulus: two years later, EPI). “In February 2010, Mr. Obama declared that the bill had created or saved as many as two million jobs, lowered taxes for 95 percent of Americans and spared the nation the next Great Depression” (Economic Stimulus, NYT, Dec 15, 2010). Having relieved from the threat of the second Great Depression, economists and policymakers find it difficult in choosing a new effective fiscal policy for the still-weak and vulnerable economy. Many notable economists believe that the government should cut back their spending and lower tax rates to curtail the national debt, while others propose budget plans that advocates rising government spending and increasing tax rates to add another boost for the economy. I personally think the second proposal is the best option for the current

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