--%>

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 : Recovery of loans-capital receipt Why

    Why is recovery of loans taken as a capital receipt? Answer: Recovery of loans is always treated as a capital receipt since it leads to refuse in financial assets o

  • Q : Tax when consumer pay high price When a

    When a tax on goat cheese is completely paid by consumers via higher prices, then the tax has been: (i) alleviated. (ii) Forward shifted. (iii) Backward shifted. (iv) Actualized. (v) Randomized. Can someone help me in getting throu

  • Q : Market imperfection associated with

    Question: This assignment in Economics, deals with macro-economics. An essay on Market imperfection associated with negative externalities. According to Economics, perfect markets would require an "invisible hand" to allocate all the resources to be a

  • Q : Problem onto marginal tax rates A

    A prosperous person who made higher and higher incomes yearly would possibly benefit most from: (w) proportional tax system. (x) progressive tax system, much like the one in place today. (y) regressive tax system. (z) fixed percentage tax system.

    Q : What is Bank rate Bank rate : This is

    Bank rate: This is the rate at which the central bank loans money to commercial bank.

  • Q : From where Washington bureaucrats

    Can someone please help me in finding out the accurate answer from the following question. Typical Washington bureaucrats derive the maximum consumer surplus from: (1) Publicity in the Senate hearings. (2) Consuming the water. (3) Writing complex regulation. (4) Eatin

  • Q : Total revenue when price modify When

    When total revenue to a firm is unaffected by small price modifications, then demand is: (i) Relatively price elastic. (ii) Relatively price inelastic. (iii) Unitarily price elastic. (iv) Vertical. (v) Horizontal. Can someone help

  • Q : Define Price What do you understand by

    What do you understand by the term Price (P) at Market in Economy?

  • Q : Inflation Inflation is frequently

    Inflation is frequently described as "too much money chasing too few goods." Is this a satisfactory definition?

  • Q : In which of these two statements

    "In corn market, demand often exceeds supply and supply sometimes exceeds demand." "The price of corn rises and falls in response to changes in supply and demand."