The Democratic Party has proposed a fiscal policy keen to enhance both economic growth and development. The policy advocates for tax cuts and increased government spending on healthcare, education, increased unemployment benefits and infrastructure (OTTERMAN, 2012). They have therefore based their arguments on Keynes economic theory which seeks government to intervene in the economy so as to stimulate aggregate demand, control inflation and increase employment opportunities. The reduction in tax cuts is made to increase disposable income a move which may encourage people to spend. The government increased expenditure in health, education, and infrastructure seeks to make Americans more productive and increase production efficiency. An in-depth scrutiny on essence of spending on education shows that the policy seeks to minimize economic inequalities because according to O-ring development theory high skilled workers earn high and improve production efficiency. The policy makes education affordable hence providing equal playing ground for children from rich and poor in determining their future.
The economy of United States started experiencing recession in year 2008. This has made people to lose jobs something which made the government keen to intervene to rescue the falling economy. Currently the economy is showing signs of recovery however; further government intervention is needed for continuous stimulation. The democrats have proposed a stimulus, budgetary and health care initiatives (TIME,2012). These democratic economic fiscal policies are aimed at enhancing both economic growth (increase in gross domestic product) and development (improving people way of ife). The democrats are justifying their economic policies by relying largely on john Keynes economic theory which was prominently applied in the period of the great depression in 1930’s (Pecchi, & Piga, 2008). This theory advocates for government intervention in the economy by the use of both fiscal and monetary policies. The essence of government intervention in the economy according to Keynes economic theory is that, aggregate demand is not always equal to aggregate supply because of some market inefficiencies. Therefore, the government should intervene to eliminate inefficiencies by directing economic to a fast path of recovery.
The proposal involves many issues which the democrats see as keen to putting the American economy back to recovery (Pecchi, & Piga, 2008). One of the proposals made is cutting on taxes on middle class. It is economically agreed that taxes reduce the amount of disposable income for households. This implies that when taxes are reduced people will have more money to spend. The increased spending in an economy increases aggregate demand, meaning that companies will be able to sell their accumulated inventories. If this aggregate demand is sustainable in long run it is likely that companies will expand their businesses operation. In turn the companies will need to increase their demand for capital goods due to sustain their expanded operation. Therefore, it is likely that tax cuts will create more jobs because of increased demand for labor. However, this may not be automatic because the USA economy is an open economy and there is likely hood of the increased disposable income being spent on imports. If the demand for exports increase at the expense of locally produced goods then this tax cut policy alone may not be adequately check the level of unemployment. To counter this negative move the government has also decreased the tax on cooperates as a way of decreasing the cost of production. This move is geared at making American products competitive in the market.
The idea of decreasing tax on companies is also aimed at attracting foreign companies and avoiding exportation of jobs. This will definitely increase level of investment which will create additional jobs in the country. Therefore, decreasing taxes is a way of increasing country gross domestic product in real terms because of the increased production. This move will therefore lead to economic growth but not economic development (Pecchi, & Piga, 2008).
The stimulus plan proposes a very large budget deficit i.e. federal deficit may go above $1.2 trillion this year. This means the government expenditure will be much above the amount of revenue collected. The democrats seeks to spend this money on extending unemployment benefits, improved healthcare, infrastructure spending and on education. At this point one would be keen to look at the result of the spending and how the economy is going to be affected.
The Keynes economic ideas which encouraged government to intervene in the economy so as to increase recovery, control inflation and create jobs proposed meaningful government spending by creation of budget deficit. Therefore, any of the above spending should be scrutinized to check on its effect on the economy. To start with, extending unemployment benefits is a way of increasing people income. The increase in this income is always seen as a way of stimulating aggregate demand in the economy hence leading to increased investments. It is worth noting that, extended unemployment benefit is able to stimulate aggregate demand faster that even increasing salary to the employed because the unemployed have higher marginal propensity to consume than the employed. Therefore, when this benefit is increased the economy is likely to grow. In addition, the standards of living of the unemployed people will to increase drastically because they will be able to afford more goods and services. Likewise, the dependency ratio will fall drastically (in micro economic sense) because those who are employed will have more money to spend on themselves but not on unemployed relatives. Consequently, the country is going to experience economic development due to improved living standards of the employed and the unemployed. However, the increase of unemployment benefit may have some harm to the economy if it is adequate to make some people opt out of work.
Increased expenditure in education is going to make education accessible to every American. When education is made accessible at a lower cost it makes people to have more money to spend on other services and goods. Definitely, the aggregate demand will increase if American will spends this additional income rather than saving (Pecchi, & Piga, 2008).
Apart from stimulation of demand there are various ways in which education spurs economic development which were put forward in O-ring theory of economic development. The proponent Michael Kremer talked about how production efficiency is determined by skill of labor. He advocated positive assortative matching which ensures people of same skill level work together. According to him this will make workers in high skilled firms to earn higher wages than others in low skilled firms doing same tasks and those in developed nations will earn significantly high than would be in measurement of their skills. This means that in long run education will be important mean of redistributing wealth and enhancing class mobility. This is because the middle class family children who are be able to access quality education as a result of this stimulus project are likely going to have bright future. Apart from earning more, there is a likely hood that American companies will not need to import expatriates because the education institutions will definitely supply quality required supply of labor.
An aspect which will make American access all jobs in their country
The theory has also shown that, high skilled labor will lead to production of quality products because there will be efficiency in production process. This will have two indications in the economy; firstly, American products will be more competitive locally and internationally. A move which will increase demand of exports leading to increased GDP. Secondly, the Americans will be able to access quality goods at low price. An improved quality of goods consumed by American is an indication of better living standards i.e. economic development (Todaro, & Smith, 2006).
Improved health care
The government has proposed increase in health care spending by making it accessible to middle and low class Americans. This is an indication of improvement in American health something which will make them more effective in their work. In addition, people life expectancy may increase considerably because of accessibility of quality medical services an indication a country experiencing economic development. It is therefore clear that, many people will live long enough to see and reap the benefits of this economic stimulus package (Todaro, & Smith, 2006).
This can also be looked in the perspective of increased demand of medical services and supplies due to subsidized cost. This increased demand will stimulate investment in the medical sector thus creating additional jobs for the people and increasing gross domestic product. Therefore, apart from securing a safe future it will make American feel the impact of the stimulus package due to increased job opportunities.
The package proposes increased investment in development of infrastructure across the country. This will definitely create instant job opportunities. The wages earned by those employed in construction of improved transport and communication network will be spent in the economy. Therefore, there will be increase in aggregate demand and this will stimulate production in different sectors through multiplier effect (Todaro, & Smith, 2006).
If the additional income earned by those employed in the infrastructure sector is spent on American goods more jobs will be created in long run. In addition, the cost of doing business will drastically fall due to low cost transportation and communication. This will led to decreased commodity prices in the market, making them accessible to the middle class and competitive in international market. Economists have argued that, when people are able to access quality goods at affordable prices it indicates both economic growth and development due to increased gross domestic product and improved standards of living.
The fiscal policy proposed by democrats which proposes tax cuts and increased government spending is mainly based on Keynes economic theory although; expenditure in education is mainly justified by O-ring economic theory. The Keynes theory advocates for intensive government intervention in the economy to eliminate market inefficiencies which make aggregate demand unequal to aggregate supply. The proposal to cut taxes aims at stimulating aggregate demand by increasing Americans disposable income an economic move which increases level of investment.
The policy also advocates for increased spending on infrastructure, improved health care, increased benefit to the unemployed and increased access to quality education. Scrutinizing these forms of expenditure shows that the party is keen to enhance economic development because the spending seeks to improve standards of living. The essence of spending on increased benefit to unemployed is to increase aggregate demand due to their high propensity to consume and reduce their dependency on employed relatives. The expenditure on infrastructure is keen to decrease cost of doing business while, spending on health care seeks to improve people health hence make them productive.
Likewise, increased expenditure on education is keen to decreasing cost of production by providing quality labor which ensures efficiency in production and decreasing economic inequality by giving a chance to middle class American children to earn more in future.
OTTERMAN, S. (2012). Republicans Are Resistant to Obama’s Stimulus Plan - NYTimes.com. The New York Times - Breaking News, World News & Multimedia. Retrieved September 10, 2012, from http://www.nytimes.com/2009/01/26/us/politics/26talkshow.html
Pecchi, L., & Piga, G. (2008). Revisiting Keynes economic possibilities for our grandchildren. Cambridge, Mass.: MIT Press.
Todaro, M. P., & Smith, S. C. (2006). Economic development (9th ed.). Boston: Pearson Addison Wesley.
Will Obama's Stimulus Package Work? - TIME. (2012). Breaking News, Analysis, Politics, Blogs, News Photos, Video, Tech Reviews - TIME.com. Retrieved September 10, 2012, from http://www.time.com/time/nation/article/0,8599,1870575,00.html