Question

Suppose the president was given the authority to increase or decrease federal spending by as much as $100 billion in order to stabilize economic activity. Do you think this would tend to make the economy more or less stable?

Answer 1

If the president was given the authority to increase or decrease federal spending by as much as $100 billion in order to stabilize the economic activity, it would all depend on how the money which is spent is acquired and on which products is it spent on, on which products has the federal spending decreased.

The economy would tend to be more stable if the money is acquired via disinvestment of distressed government assets in creating jobs for the economy, thus the multiplier effect will be high, wherein the $100 billion would generate more wealth in the economy.

However, the economy would tend to be less stable if the money was acquired by increasing the level of government debt which is already quite high at close to 100%, United states debt to GDP ratio was 106.9% in 2019. This would increase the debt repayments and whatever future revenue it would generate, would be spent on repaying those interest payments. And the economy would be all the more less stable if the money is spent on unproductive assets which do not generate any multiplier effect. Thus if the government has to borrow more and there is no multiplier effect then decrease in federal spending would make the economy stable.

Thus in order to make the economy more stable if the $100 billion is spent on creating jobs than it would be good for the economy. But if the level of debt increases a lot than it could have a drastic negative impact and in such cases the federal spending should decrease which is funded via borrowing.