Fiscal policy is elaborated as the use of government tax policy and spending to influence the economic path of a country over a particular time. Automatic stabilizers are set passive policies that are operational once the system in place. Congress does not necessarily have to indulge in the system (Amadeo 1). A discretionary fiscal policy is a type of active policy incorporating contractionary and expansionary measures to slow or speed up the growth of the economy. Expansionary policies are activated when the Congress of the US cuts down rates of taxes or increase the spending of government resulting in the shift of the aggregate curve of demand to the right. Conversely, contractionary policy happens when there is a raise of rates of tax by Congress or cuts on the spending of government resulting in the shift of demand on aggregate to the left.
Political and Economic Background
Approximately, all the discussions on the economy by macroeconomists are mostly based on monetary policy since the Roosevelt and Hoover administrations ran minimized deficits over their time in power in the 1930s (Fishback 385-413). Both administrations were able to increase spending of government. More so, tax revenues significantly increased in the reign of either administration. Conversely, a majority of observers are not able to realize the extent to which the Hoover administration was able to increase spending of government. The main reason was that Hoover was a strongly balanced budget advocate in his presidency. Hoover, contrasting to Roosevelt did not champion the increases in spending with public and relief programs. Alternately, he expanded programs that were in existence through doubling expenditure on federal highways and elevating the Army Corps Engineers on harbors, flood control and rovers by more than 40% (Fishback 385-413).
Furthermore, Hoover dam was a vital element of the enhanced work and spending by the public since it was initiated before the Great Depression. The administration of President Hoover and Congress massively increased the nominal expenditures of the federal government to$ 4.6 billion from $3.1 billion between 1929 and 1933 (Fishback 385-413). The expenditure of the government escalated by more than 88%. Moreover, the fall of tax revenues was implemented in addition to the increase on spending with the budget falling into deficits. The administration of President Hoover operated with deficits since real and nominal tax revenues dropped caused by the dilapidation of the economy. They tried to reverse the tax revenues’ drop through an act in 1932 that incorporated the increase of taxes on the ‘rich minority (Fishback 385-413).’
Consequently, not more than 10% of households were able to earn enough to make payments of income taxes since people with annual income less than $2.000 and families comprising of four but not more than $5,000 in income were tax exempted (Fishback 385-413). Comparatively, individuals with income of more than $5,000 had their rates increased in addition to others of the similar range. Corporate tax increased to 13.75% from 12% (Fishback 385-413). The rise in the rates of income tax was not enough to measure to prevent the fall in tax revenues since household receipts, and corporations' estate and income taxes fell to %780 in 1933 million from $1 billion in 1932 (Fishback 385-413). The reason for equilibrium in tax collections was the Revenue Act of 1932 with taxes exercised on electricity, manufacturing more so tyres, gasoline, oil, and transfers on oil pipelines (Fishback 385-413).
Landslide win for Roosevelt made him President. His administration took Congress to ensure a rise in the yearly government spending to $6.5 billion steadily increasing to $8.4 billion in 1936 (Fishback 385-413). Conversely, the expenditure fell to $6.8 billion after two years before ramping up in 1939 to $8.8 billion (Fishback 385-413). Moreover, the steady rise of tax receipts between 1933 and 1938 characterized the slight increase in deficits during the Roosevelt administration (Fishback 385-413). A significant portion of the rise is a reflection of the increase in excise and income tax collections undertaken in the recovery. Notably, the rates of income tax were constant at high levels. The administration of President Roosevelt adjusted the rates of income tax by several tenths for income earners between $2,000 and not more than $20,000 similar to those earning more than $20,000 to $1 million (Fishback 385-413).
Concepts related to Expansionary Fiscal Policy
As the United States reeled from the Great Depression in the 1930s the government begun the enactment of fiscal policies to support not only its structures but also the promotion of economic growth in addition to social policies (Countrystudies 1). John Keynes influenced policymakers with an argument on the general employment, money and interest theories and inadequate services and goods' demand caused that increase unemployment. Keynes elaborated that people lacked enough income to purchase items produces by the economy resulting in a fall in prices with companies losing everything and going bankrupt. Consequently, without the intervention of the government, Keynes explained that it could be a constant vicious cycle. He elaborated that there would be more loss of jobs with the increase of company bankruptcy.
Keynes iterated that there would be a continuous downward spiral of companies failing if the government failed to implement the policy of increasing its spending and cutting taxes. Notably, income would increase, and people would be bound to spending more stabilizing the economy to grow again. Additionally, if the government does not have enough funds to serve the purpose, Keynes explained that they could obtain a deficit since economic declination would cause havoc in the country. Eventually, the strategies suggested by Keynes were accepted partially in the 1930s (Countrystudies 1). Moreover, increased military spending during the Second World War confirmed his measures to be effective. The surge of government spending caused an increase in the income of the people causing factories to be operational with the depression hardship falling into history. The aftermath of the war saw continued economic growth with increased families' demand looking to purchase and start homes and families.
Policy makers in the 1960s were devoted to the theories of Keynes (Countrystudies 1). However, a majority of Americans were in agreement that the government had made several mistakes on economic policies that called for the assessment of the country's fiscal policies. After the enactment of the tax cut act of 1964, President Johnson and the Congress developed an expansive program on the alleviation of poverty (Countrystudies 1). President Johnson additionally increased the spending of the government on the war in Vietnam. The above programs of government in addition to the increased spending of consumers increased the demand for services and goods that were produced by the economy.
Prices and wages rapidly rose to result in inflation. Inflation is characterized as the overall price increase. Keynes made an argument that in such times of excessive demand, the government was supposed to reduce the overall spending then and increase taxes. However, the policies for reducing inflation were hard to campaign for politically with the government resisting their imposition. In the 1970s there was an acute increase in the international prices of food and oil in the US (Countrystudies 1). Generally, policymakers faced a dilemma at the time. Cutting government spending and raising taxes would drain the income of the economy that was already characterized by high prices of oil.
Ultimately, the above factors would result in a rapid increase in the levels of unemployment. If policymakers chose increasing the prices of oil to counter income loss, they would have to increase spending or reduce taxes (Countrystudies 1). The President Carter administration however employed the expansionary policy allowing the increase in deficits to curb unemployment. The President developed voluntary price and wage controls to control inflation. However, none of the approaches were effective resulting in high rates of unemployment and increased inflation. Deficits were characterized as a permanent challenge to the economy of the US.
A key fiscal policy argument is that the government increased expenditure is to offset the increased saving of the private sector and the fall of spending in the sector. At the beginning of the 2009 recession caused a rapid rise of consumers looking to cut down spending. Consequently, demand fell. The expansionary fiscal policy could be easily incorporated to make use of the savings increase through more expenditure. One key challenge of the expansionary fiscal policy is that it results in the size increase of the budget deficit of the government (Lumen 1). Essentially, increased borrowing could cause massive deficits resulting in markets fearing debt defaulters and hence push up rates of interest on the debts of the government. It is also referred to as a financial crowd out. Also, a resource crowd out is caused by increased borrowing. It is caused by an increase in bonds purchased by investors leaving the government with less to incorporate in private investments.
Neither aggregate demand nor supply neatly move in the real world more so over limited time periods. Aggregate demand could not grow at high speed as aggregate supply in addition to the possibility of a decline that could result in a recession. The economic challenge is often caused by the hesitation of households to consume; hence companies invest less. Moreover, another factor is the decrease in exports' demands from other nations. For instance investment by US private firms in the economy of the US increased from 14.1% of the GDP of 1993 to 17.2 percent in 2000 (Lumen 1). The GDP ten decreased in 2002 to 15.2 percent. Conversely, aggregate demand increase could occur ahead of aggregate supply increase resulting in inflationary price level increase. Altogether, Cycles for the business of boom and recession result from shifts in aggregate demand and supply. In the occurrence, the government would prefer the use of fiscal policies to impact the challenge.
Aggregate demand is increased by expansionary policies by the government increasing their spending in addition to cutting taxes. The expansionary approach could be implemented through ensuring the increase in consumption via increasing disposable income by undertaking cuts in payroll or personal income taxes (Pettinger 1). Secondly, raising profits after tax through cutting business taxes could result in increased investment as a method of expansionary fiscal policy. Moreover, the policy is triggered through increasing the purchases of government enhanced by an increase in federal government expenditure on final services and goods in addition to increasing local and state government grants that in turn increase their spending on final services and goods.
Agents for and against the Expansionary Fiscal Policy
The Roosevelt and Hoover administrations were mostly run on deficits. Majority of macroeconomists relate both policymakers to be characterized by the Keynesian stimulus since the deficits were minimal relative to the declines of the economy in the 1930s. During the time, Maynard Keynes introduced his theories elaborating that the economy could be brought from a high unemployment rate level through the increase of government spending and tax lowering resulting in an increased deficit in the budget. Despite President Roosevelt ramping up spending, he was chastised by Keynes for not undertaking enough measures to recover economic growth. Keynes in 1933 declared that government increased spending was not enough and that taxes were required to be cut more and large deficits of the budget implemented.
The President Obama administration incorporated expansionary policy through the "Economic Stimulus Act." Moreover, unemployment benefits were extended with the "American Recovery, and Reinvestment Act cut taxes, in addition to the funding of projects of public works. Later in 2010, President Obama advanced the benefits with the implementation of Obama tax cuts (Amadeo 1). The President Bush administration incorporated the policy to ensure the end of the recession of 2001. The government ensured they reduce income taxes with the implementation of the “Tax Relief Reconciliation and tax rebates Act.” However, the terrorist attack of September 11th drastically affected the economy again. President Bush began the war on terror (Amadeo 1). Over his reign, he reduced taxes for businesses, and by 2004 the economy of the US had stabilized with joblessness at only 5.4% (Amadeo 1). Besides, entry of the US soldiers in Iraq was a demonstration of the administration using the expansionary fiscal policy.
President Kennedy was a promoter of the expansionary policy throughout his time in office. He incorporated the policy to ensure the economy was stimulated from the recession in 1960 (Amadeo 1). He made a promise of the sustenance of the policy until the end of the recession notwithstanding the debt impact on the country.
Opinion
The expansionary fiscal policy has proved to have both positive and negative impacts in relation to the economic factors of a country. A key example has been identified in the text explaining how increased government spending in the world war resulted in the stabilization of the economy. Conversely, decreasing income tax could fail to cause increased aggregate demand with a falling prices for houses and decreased confidence. For instance, the US cut their taxes in 2008 aiming at boosting spending (Pettinger 1). However, at the time the economy was faced with depreciating confidence and house prices with a credit shortage. The above factors rendered expansionary fiscal policy redundant and ineffective to be used for the promotion of economic advancement.
The Expansionary policy is fast and effective if undertaken in the right way. For instance, spending by the government should be advanced towards the hiring of laborers. Ultimately, the measure results in the creation of jobs and hence decreased unemployment. Tax cuts are the best method of putting funds into the consumers' hands if the government could immediately issue rebate checks. Moreover, the best approach is the expansion of the joblessness compensation. Individuals without jobs often spend all the money they get.
Alternately, those having high incomes are most likely to incorporate tax cuts to ensure they invest or save. Ultimately, the essential measure of the expansionary policy is that it restores confidence in business and the consumer. Both business people and consumers believe that necessary measures would be undertaken by the government to ensure the end of an economic slump. It is crucial for both parties to restore their confidence in spending. Without either element’s having confidence in the government, individuals could take their money and keep.
Conclusion
Keynes was an advocate for expansionary fiscal policy to be incorporated in the event of a recession characterized by loss of jobs, increased saving and the drop of real output. He elaborated that the government injection on spending could trigger economic activity in the country resulting in the re-employment of useful resources for production. He concluded that it ensures the economy is recovering at a faster rate than the attitude of laissez-faire. Cutting of income tax by the government will result in the increase of consumers’ disposable income. Therefore, increased consumption will cause increased aggregate demand triggering economic growth.
Alternately, the government’s increase in public schemes investments, such spending creates jobs and increases income causing the increase in aggregate demand. Moreover, the money injection into an economy stirs a multiplier effect in the positive direction. For instance, if a builder gets a job, they will spend their money that creates more jobs in other sectors of the economy. Furthermore, from the initial government injection, the last real GDP increase will be better than the initial injection. Moreover, the expansionary fiscal policy could result in inflation caused by the increased demand in the economy.
References
Amadeo, Kimberly. "What Sets Bush and Obama Apart from Clinton." The Balance. N.p., 2018. Web. 6 Oct. 2018.
Countrystudies. "United States Economy - Monetary and Fiscal Policy." Countrystudies.us. Web. 6 Oct. 2018.
Fishback, P. "US Monetary and Fiscal Policy in The 1930S." Oxford Review of Economic Policy 26.3 (2010): 385-413. Web. 6 Oct. 2018.
Lumen. "Expansionary and Contractionary Fiscal Policy | Macroeconomics Fall 2018." Courses.lumenlearning.com. N.p., 2018. Web. 6 Oct. 2018.
Pettinger, Tejvan. Economicshelp.org. N.p., 2017. Web. 6 Oct. 2018.
