Question

Expansionary Fiscal Policy relies on changes in tax collections and government spending to achieve a non-inflationary level of employment. Given this definition what actions and projected consequences did President Obama enact to realize this goal. Include in your discussion economic conditions that existed prior to the 2008 election, i.e. the mortgage/real estate crisis, employment & unemployment, provisions President Obama used to offset the economic conditions, projected benefits vs projected detriments to the economy. Be sure to include your conclusion on whether you believe that President Obama was correct or not. Can you please answer this question specifically? Thank you

Answer 1

It is important to note at the onset that the United States faced one of the worst financial and economic crisis in decades during 2008-09. The crisis started with the housing sector and financial sector. However, the contagion quickly spread to the whole economy and GDP growth plunged coupled with unemployment peaking at 10% in 2009. In extraordinary times, extraordinary policies are needed for economic revival. The central bank pursued ultra-expansionary monetary policy while the government pursued expansionary fiscal policy. With this overview, the point to be made is that fiscal policy relating to an increase in government spending and reduction in tax rate was needed at that time. While government intervention in the economy is not always good, it is necessary in times of crisis. If the free markets are allowed to function, the crisis can be deep and prolonged. Therefore, President Obama was right with the expansionary fiscal policies pursued.

Coming to the specifics of the expansionary fiscal policy, the "The American Recovery and Reinvestment Act of 2009" was passed by the Congress and included the following major actions -

1. A tax cut of $800 for families through reduction in withholding tax coupled with $70 billion in minimum alternative tax extension.

2. Investment in infrastructure, education and the healthcare sector.

3. Extension of unemployment benefits for another 33 weeks

4. Increased investment and tax benefits for alternative energy production

While there were several other benefits for individuals and companies, the core objective was to jump start economic growth. Just as an example, lower taxes would imply higher disposable income for households and this triggers consumption spending. Similarly, investment in infrastructure, healthcare and education sector would imply benefit to these sectors (including job creation) and benefits for all related industries.

The fiscal stimulus coupled with the monetary stimulus did help the economy recover from the deep crisis and also helped the financial system stabilize.