--%>

Federal fiscal stimulus in 2009

Question:

Was the stimulus package passed in 2009 as success?  In answering this question the focus should be the articles on the syllabus, but you should also include opinions of other commentators.   Your answer should also describe why coming to a clear conclusion on this issue is difficult.

Answer:

To start with, the federal fiscal stimulus in 2009 was not as big as it could have been, and as it seems to naked eyes. The federal stimulus was accompanied by a spending cut by the state and local bodies. This, in effect, led to a very small resultant increase in the federal spending.

To discuss the performance of the economy after the stimulus, we have the data to show how the economy is performing. So the FOMC report concludes that there has been an increase in unemployment, a fall in household consumption expenditure, housing sector is still to recover, and the nonresidential structure sector is also in a bad shape. To add to the problems, inflation rate is high due to the high prices of the essential commodities. More so importantly, the tax cuts which were supposed to induce the households to increase their spending, and hence increase the aggregate demand, have mostly failed in their mission. So, overall we may that the economy is still in a bad shape and it may seem easy to assume that the fiscal stimulus has failed to revive the economy.

However, there is something to ponder about here. What would have been the state of the economy had the fiscal stimulus not been provided? Would it have been the same, better or worse? It is true that the tax cuts of 2008 induced only 25% of the households to increase their consumption, and the ARRA stimulus tax cuts were associated with only 13% of households increasing their consumption, nevertheless, there was an increase in the consumption and hence aggregate demand. Households are supposed to smoothen out their consumption rather than acting abruptly to a tax cut. But the point under consideration is that had these tax cuts not taken place, wouldn't the households' and overall economic expenditure had been even lower? The answer is yes. There might have been a downward spiral of declining aggregate demand and spending. The stimulus at least brought some kind of relief.

Therefore, three things come to fore. First, the full gains of the stimulus were not realized due to a simultaneous cut back by state governments. Second, the gains from the stimulus are not as big as expected and the economy is still in a state of uncertainty. Third, the situation could have been even worse in the case of absence of stimulus, however, it this assertion cannot be tested easily.

   Related Questions in Macroeconomics

  • Q : Backward shifting of incidence tax When

    When firms bear the legal incidence of a tax, this is backward shifted while: (1) firms burden consumers by raising their prices. (2) the tax burden is borne by workers in the form of lower wages. (3) resource suppliers seek higher factor payments to

  • Q : Assignment for help Help me with this

    Help me with this assignment! Just 25 questions! Thank you so much!

  • Q : International trade the most frequently

    the most frequently asked question on foreign direct invetment

  • Q : Evaluation of net present value Explain

    Explain evaluation of net present value (NPV) and internal rate of return (IRR) in brief?

  • Q : Why government taken as capital receipt

    Why the borrowings by Government are taken as capital receipts?

  • Q : Define Devaluation Devaluation means

    Devaluation means decrease in the external value of a country’s currency as an aware policy measure adopted by the Government of a country. In another words, we make our currency less costly in terms of foreign currency. This builds our goods ch

  • Q : Greatest Consumer Surplus problem I

    I have a problem in economics on Greatest Consumer Surplus. Please help me in the following question. Usual Americans undoubtedly derive the greatest consumer surpluses from the: (i) Summer vacations. (ii) Jelly and Peanut butter. (iii) Gold jewellery

  • Q : Difference on consumer willing to pay

    I have a problem in economics on Consumer Surplus-Difference consumer willing to pay and what actually pay. Please help me in the following question. The consumer surplus signifies to the difference among the: (i) Satisfaction of wealthy people and th

  • Q : The European debt crisis Quetion:

    Quetion: Describe the present economic crisis situation in Europe.   Why has it been so difficult for the Europeans to find a solution to this problem?   Comment on what implications the crisis may have for the rest of the

  • Q : Computing Fiscal deficit In government

    In government budget, primary deficit is Rs. 10,000 crores and interest payment is Rs. 8,000 crores. Compute the fiscal deficit?