The Congress and the Fiscal Cliff

Is Government the Solution or the Problem?

Sep 9, 2011 • Businesses, Economic Debates, Economic Thinkers, Gender Issues, Government, Households, Labor, Macroeconomic Measurement, Regulation • 208 Views    No Comments

Maybe everyone got something from President Obama’s jobs plan. According to the Washington Post’s Ezra Klein, the “right” got tax cuts, the “left” got help for the unemployed and infrastructure spending, and everyone will get deficit reduction. For a quick summary, this graphic is ideal.

On the other hand, each side might believe it did not get enough.

Representing a left of center view, here is what Paul Krugman has been saying:

  • With residential construction plunging and consumer saving soaring, there has been a massive decline in spending. So far, the amount spent by the federal government has insufficiently compensated for the decrease.

Dr. Krugman’s conclusion? The stimulus “wasn’t big enough to do the job.”

For the right of center perspective, Stanford economist John Taylor said this during his congressional testimony on the 2009 stimulus package:

  • Referring to federal government purchases of goods and services, he said it had a minimal impact on GDP because a “tiny slice” of dollars were allocated to federal direct spending.
  • For the grants that states and local governments got, they mainly used the money they got to reduce their borrowing rather than spend it on GDP related goods and services.
  • Similarly, payments and tax benefits targeted for increasing households’ disposable personal income were not reflected by expenditure statistics.

Dr. Taylor’s conclusion? “Increased debt…is likely a drag on economic growth.”

The Economic Lesson

People who agree with Dr. Krugman believe, as did John Maynard Keynes, that government can jumpstart the economy

Those who support Dr. Taylor’s view would take us to Adam Smith, Friedrich Hayek, and Milton Friedman who said that government inhibits individual productivity and initiative.

An Economic Question: Do you believe that government is the solution or the problem? Explain.

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