Posts Tagged ‘Economy Government’

Stabilizing the Economy: Government Fiscal Policy

Sunday, February 14th, 2010


Rather than merely hiring the unemployed to do work of little value. For example, tax cuts increase consumer spending, which stimulates many industries. Also, the effects of government spending (such as on a public works project) will spread, via the multiplier effect, through the economy, increasing consumer spending, too. Also, by generating a more favorable economic climate, these efforts by the government can result in increased business investment spending. Thus, the effects of budget deficits designed to stimulate employment will be felt all through the economy, from the toy industry to the construction industry – not merely in the hiring of the unemployed by the government.

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Pump Priming

Saturday, September 5th, 2009


Fiscal policy to stimulate the economy can also involve the accelerator effect. Once the level of consumption spending has risen to the point where it is causing induced investment spending by business, the economy should be able to carry on its recovery without further stimulation from government budget deficits. In fact, further deficits at this point would not help the economy; they would only boost demand to excessive levels and cause inflation. This is the concept of “pump priming” : to get a well to work, you have to pour some water into it first; however, after that is done, the well works without further assistance. Similarly, the economy may benefit from a boost to start it on a path to recovery out of a slump, but beyond a point, no further boosts are needed.
The concept of “pump priming” views budget deficits as a temporary stimulus to the economy rather than as a permanent replacement for business investment spending. Indeed, in a basically “free-enterprise” economy, government spending cannot replace business investment’s vital role of adding to the economy’s stock of capital goods, and thus to future prosperity. Thus, the key to long-term prosperity lies in private business capital investment, while temporary expansion of government spending and budget deficits can help to combat periodic recessions.

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Stabilizing the Economy: Government Fiscal Year

Sunday, August 9th, 2009


We examined the problem of economic instability – the tendency of the economy to go into periodic slowdowns, or recessions. Prior to the 1930′s these were generally regarded as temporary adjustments of the economy and of little significance. The prevailing view among economists was that a free-enterprise economy would, if left on its own, provide “full employment” automatically, without any need for intervention by the government. This belief was based on elaborate economic theories that formed the theoretical basis for “laissez-faire”- the belief that the government should not interfere with the economy. Since the economy automatically provided full employment, so the theory said, why interfere with it?

However the Great Depression of the 1930′s, in which the economy wallowed for a decade, forced a rethinking of economic theories. The main challenge to the traditional “laissez faire” theory was advanced by John Maynard Keynes in “The General Theory of Employment, Interest, and Money,” published in 1936. Keynes’ basic theory was that the governmnent’s control over a major “injection” into the spending stream (government spending) and a major”leakage” from the spending stream (taxes) gave the government the opportunity to influence the level of aggregate demand for goods and services in the economy, and thus to influence the performance of the entire economy.

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