Thursday, January 17, 2008

The Economy

Today Ben Bernanke called for Congress to intact a fiscal stimulus plan, this is in line with traditional Keynesian programs to “correct” economic downturns and in theory it sounds good, but in practice they rarely work out as well as they should. The first reason that it will probably not have much effect is the size of the package, 150 billion dollars, while that sounds like a lot of money one has to remember that the total size of the United State economy is around 13 trillion dollars, so this package would only be the equal to slightly more than 1.1 percent of the US economy. The next problem is that the package calls for tax rebates; a tax rebate is when the government gives a person an advance on future tax refunds, it’s not a decrease in tax rates. In Keynesian economic this short term increase in people wealth will cause them to spend more and increase economic activity, the problem with this that people are not stupid and they realize that they will have to pay back this tax rebate or it will be taken out of there future tax refunds, so they realize that they have not had a real increase in there income and they do not increase there spending. Empirical evidence from President Bush earlier 300 tax rebate, in 2001, and from when the first President Bush reduce tax withholding to try and encourage spending, show that a large portion of the American public did not increase there spending any in response to short term tax rebates or reduction in tax with holding that were not accompanied by real cuts in the tax rates. Along with this the Fed should quite cutting interest rates, interest rates in the United State are already quite low and there already some evidence of rising inflation. On the plus Bernanke called to have the earlier Bush tax cuts made permanent.

Instead of short term fiscal stimulus package, the Government should be working on correct the action that it has made that has harmed the United States’ economy. First the United States Congress and the President needs to bring its spending under control and balance the budget, reducing the deficit and in the long term keeping the debt under control. Secondly by keeping spending under control, the Government should then move on to keeping taxes low and improving the country’s infrastructure. Doing these in the long run would do far more to improve the US economy and the lives of the common person than short term stimulus package. The United States needs to move beyond the failed Keynesian policies of the past.

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