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Economic Impact of Government Fiscal Policy

Abstract
There is a great deal of discussion amongst economists regarding government’s approach to economic stimulation. The discussion centers on fiscal policy, and whether the government should take a Classical or Keynesian approach regarding U.S. economic issues. In this paper we briefly explore the Keynesian side of fiscal policy in an effort to see if government intervention serves as a useful tool in stimulating economic growth.

Economic Impact of Government Fiscal Policy
Over the course of the last few years there has been much discussion regarding the state of the U.S. economy and what the “right” approach is to stimulating economic growth and prosperity. As the 2004 election approaches, there is significant discussion by Democratic presidential candidates about the Clinton economy verses the Bush economy, as they compare and contrast the two administrations fiscal policies (Berlau, 2003). Even the media contributes to the debate regarding which administration’s fiscal policy is responsible for the current challenges faced by the U.S. economy.

Still the question remains, does the Keynesian activist approach serve the nation better in stimulating economic growth and prosperity, or would the nation be better served to follow a more Classical “laissez-faire” non-activist approach? The debate will undoubtedly continue for many years to come. But what is important to this discussion is how fiscal policy might influence the economy in hopes of jump-starting growth.

Fiscal policy is a deliberate change in government taxes or spending to stimulate or slow down an economy (Colander, 2001). It can take one of two forms. It can either take the form of an expansionary policy or that of a contractionary one. As an expansionary policy it acts to decrease taxation and increase spending. As a contractionary policy it does the opposite. It increases taxes and decreases spending.

A determinant as to which policy approach used hinges on how the government views current economic performance based on a number of economic indicators. One key indicator of productivity and growth in the economy is Gross Domestic Product (GDP). GDP represents the market value of all finished goods and services produced in the economy as stated in the prices of a given year (Colander, 2001). When considering the health of the economy the government focus is on how this overall production compares to the overall consumption or expenditures. In macroeconomics this is viewed as the aggregate performance.

Aggregate production is the total of all goods and services produced, while aggregate expenditure is the total of consumption (C+I+G+(X-M). What is most important in this comparison is how aggregate production compares to aggregate expenditure in relationship to aggregate income. If aggregate production outpaces aggregate expenditure than aggregate income is said to be above target income and the government might institute a contractionary fiscal policy. If the reverse is true than the government might institute an expansionary fiscal policy. It is important to note that target income is achieved when planned expenditures equal production. In economic terms this is viewed as equilibrium.

In the current U.S. economy it would appear that aggregate production and expenditure are such that an expansionary fiscal policy is in play. That is the government has instituted a fiscal policy aimed at reducing the tax burden on both individuals and businesses while concurrently increasing spending. Albeit some of the increase in spending is a result of the catastrophic events of September 11, 2001, and the following conflict in Iraq. Still, the hope is that such a fiscal policy will stimulate increased consumption (spending) by both individuals and business. The theory being that by placing more money in the pockets of those that feed the economy, the economy will be the benefactor of added growth. Specifically, that consumers will spend more on available goods and services, and businesses will invest in growth related initiatives leading to increased employment opportunities.

The article by Berlau does support an increase in retail sales, indicating a 12.1 percent rise for June, July and August 2003. However, investment by business has not necessarily followed suit, and new job creation continues to lag. Still the article points out that Brain Wesbury, chief economist of Griffin, Kubik, Stephens and Thompson, a brokerage firm in Chicago, is optimistic that the economy is getting stronger. In fact, he shares that Joseph Lisanti, editor of Standard & Poor’s The Outlook, states, “We’re seeing very good indications of GDP growth. Right now, we’re looking at third-quarter (Q3) growth to surge to about 6 percent, and possibly as much as 8 percent…. Attributing this growth and future economic growth to the Bush fiscal policy.

What may be an interesting factor to consider regarding growth in jobs is whether the impact of technological advances, leading to increased efficiency, has played a role in slowing employment growth and hence a stronger U.S. economic recovery. Take the telecom industry for example. There have been signs of economic recovery in the telecom industry. BellSouth reports profits up 46% in third quarter (Miami Herald, AP, 2003). Yet it has really been a “job-less” recovery. We do see telecom providers investing in infrastructure technology to meet the anticipated demand for new emerging technologies such as Voice over Internet Protocol (VoIP), while continuing to reduce their workforce. To further complicate economic matters on the job front, while these investments in emerging technologies should lead to increased employment opportunities in the U.S. Information Technology (IT) sector, many firms are outsourcing IT/Hardware related functions offshore to locations such as India.

Clearly there is evidence that pro-active government fiscal policy can contribute to increased economic growth. This is evidenced by the average U.S. consumers’ willingness to increase spending on retail goods and services. Still there are indications that other economic factors, particularly in the business arena, must be considered when looking for sustained economic growth. Government fiscal policy can and often does stimulate growth but such a policy is only one in a series of economic stimulus to be considered.