Tuesday, February 17, 2009

Stimulus? An Excerpt from Wikipedia (my comments at the end)

"In economics, Fiscal policy refers to government attempts to influence the direction of the economy through changes in government taxes, or through some spending (fiscal allowances). It is the use of government spending and revenue collection to influence the economy. Fiscal policy can be contrasted with the other main type of economic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money. The two main instruments of fiscal policy are government spending and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy:
  • Aggregate demand and the level of economic activity;
  • The pattern of resource allocation;
  • The distribution of income.
Fiscal policy refers to the overall effect of the budget outcome on economic activity. The three possible stances of fiscal policy are neutral, expansionary and contractionary:
  • A neutral stance of fiscal policy implies a balanced budget where G = T (Government spending = Tax revenue). Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.
  • An expansionary stance of fiscal policy involves a net increase in government spending (G > T) through rises in government spending or a fall in taxation revenue or a combination of the two. This will lead to a larger budget deficit or a smaller budget surplus than the government previously had, or a deficit if the government previously had a balanced budget. Expansionary fiscal policy is usually associated with a budget deficit.
  • A contractionary fiscal policysurplus than the government previously had, or a surplus if the government previously had a balanced budget. Contractionary fiscal policy is usually associated with a surplus.
Fiscal policy is used by governments to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment and economic growth. Keynesian economics suggests that adjusting government spending and tax rates are the best ways to stimulate aggregate demand. This can be used in times of recession or low economic activity as an essential tool in providing the framework for strong economic growth and working toward full employment. The government can implement these deficit-spending policies due to its size and prestige and stimulate trade. In theory, these deficits would be paid for by an expanded economy during the boom that would follow; this was the reasoning behind the New Deal.

Some classical economists argue that fiscal policy can have no stimulus effect; this is known as the Treasury View, and categorically rejected by Keynesian economics, which is predicated on fiscal stimulus being possible.

During periods of high economic growth, a budget surplus can be used to decrease activity in the economy. A budget surplus will be implemented in the economy if inflation is high, in order to achieve the objective of price stability. The removal of funds from the economy will, by Keynesian theory, reduce levels of aggregate demand in the economy and contract it, bringing about price stability.

Despite the importance of fiscal policy, a paradox exists. In the case of a government running a budget deficit, funds will need to come from public borrowing (the issue of government bonds), overseas borrowing or the printing of new money. When governments fund a deficit with the release of government bonds, an increase in interest rates across the market can occur. This is because government borrowing creates higher demand for credit in the financial markets, causing a lower aggregate demand (AD) due to the lack of disposable income, contrary to the objective of a budget deficit. This concept is called crowding out. Alternatively, governments may increase government spending by funding major construction projects. This can also cause crowding out because of the lost opportunity for a private investor to undertake the same project. Another problem is the time lag between the implementation of the policy and detectable effects in the economy. An expansionary fiscal policy (decreased taxes or increased government spending) is usually intended to produce an increase in aggregate demand; however, an unchecked spiral in aggregate demand will lead to inflation. Hence, checks need to be kept in place." - Thanks www.wikipedia.org !

What does all of this mean? In my humble view, the government is not going to be successful in "spending" its way out of the recession. We need to affect the heart of the matter - our behavior as consituents and consumers. Quite simply, we expect too much and we know too little. We also don't think about the value that we produce in our own economy. Do we really need all the things we are told to buy on television or in media? Do we need to take as many drugs as we do? Do we need to drink as much or as often? Our expections of reward are far out of line with the value we create. Take a good look at your quality of life and really reflect on the things you consume. Do you need all that you have? Or do you simply want it? For that matter, are the things you posess simply a placeholder or a way to keep score? Our government has spent decades doing the same thing. If we have more weapons, we must have the greater society.

I am not convinced. I am futher not convinced that we deserve all that we have. Perhaps a readjustment of what we have is in order. Hopefully it will be peaceful. I wish government would do less to interfere with my life and the lives of those around me. I wish government would protect, educate and serve. Right now I feel like we are sliding ever more quickly into socialism. The wants or needs of the masses will never be satisfied and will never be reasonable. What has happened to reason?

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