Introduction
There are numerous factors which affect the contemporary economy in different manners. When a government intends to bring the desired change in an economy, it focuses on a few of these factors. From the methodical study of governments and their economic priorities, it is apparent that for governments, prime concerns or objectives are economic growth and full employment. Governments and its institutions (Central Bank) use fiscal and monetary policies to realize these objectives.
Spending
Government spending is generally understood as an amalgamation of consumption, investment, and transfer of payments. When a government decides to increase its spending, it emphasizes either one of the elements (that constitute it) or on all of the elements. It is essential to understand that government spending has not only objective(s) but also a method. For instance, governments around the world use a fiscal instrument (government spending) to realize various kinds of socioeconomic objectives. The use of the fiscal instrument, for the realization of objectives, is more common in developing countries in comparison to developed countries. Developed countries tend to increase spending (Fiscal Stimulus) when the economy is in turmoil. The increase in spending, in the form of investment and consumption, increases employment and shifts the demand curve to the right, which also affects the general price level. However, as the size of spending increases, so does the size of government, yielding various kinds of challenges (International Monetary Fund, 2000).
I believe that government spending should be a strategic decision, which must be implemented to realize important objectives, such as intensifying economic activity during recession/depression or to provide facilities such as the health care system. However, during all periods, increase/decrease in spending must have a method, and it must have identified goals.
Trump Administration intends to reduce government spending, especially for programs such as Healthcare; however, it intends to increase military spending. It reveals that government spending is inevitable; however, it can be regulated and directed. When the government increases spending on programs that promise greater dividends, the spending can be justified. Similarly, when an increase in spending is unable to produce better outcomes, then such spending hurts the economy. For instance, the United States have increased military spending many folds, despite that fact that the US spends the most than any other country in the world (defense budget is more than China, Saudi Arabia, Russia, the United Kingdom, India, France, and Japan combined). It is a perfect example of irrational government spending. A government must prioritize its spending and must develop an effective method for that (Carroll, 2016).
Taxes
Governments, around the world, levy taxes on individuals and organizations to generate revenue, which is then used to fund various public expenditures. Therefore, we can say that tax is revenue for a government, which is to be used in a prescribed/approved manner or fashion. In democracies, it is the parliament or congress that not only decides how much tax a government should levy upon private citizens and businesses, but also decides in which manner the collected funds must be spent. However, studies also reveal that taxes are more than just revenue for a government; they are instruments to affect the economy. For instance, as the size of income tax increases, the size of consumption decreases in an economy. Consumption is considered an engine of growth; therefore, when consumption dwindles, so does the intensity of economic activity. During the recession, governments reduce taxes to increase economic activity. Similarly, when the economy is heating up, contractionary fiscal and monetary policies are applied, which increase the size of taxes on private citizens and businesses.
Trump Administration, which believes in Trickle-down economics, has introduced tax-cuts of $1.5 trillion for businesses, which will increase the economic activity in the United States (Paletta, 2018). However, economists are not sure how much ordinary people will benefit from such actions. As per my understanding, the trickle-down theory is a flawed theory, which produces tilted results. In fact, it is the cause of income and wealth inequality in many countries. As per recent reports, six months after the introduction of the massive tax-cut, wages have not changed. Also, economists are projecting a $2.3 trillion increase in the deficit (over a decade).
Economic Stimulus Programs
As per most simple definition, Economic Stimulus is an expansionary monetary/fiscal policy. When an economy goes into recession, Central Bank employs an expansionary monetary policy (first line of defense), which reduces interest rates and increases supply of money in an economy. As expansionary monetary policy also reduces the reserve ratio, the effect of the expansionary monetary policy is strong and immediate. Similarly, when governments employ an expansionary fiscal policy (fiscal, economic stimulus), the size of investment in an economy increases, which affects directly 1) employment, 2) demand and 3) general price level in that economy. Many studies have concluded that Capitalist economies are inherently flawed, which means that they would continue to produce recession and booms. Therefore, economic stimulus programs will remain part of economic strategy for a very long period.
I believe that Keynesian economics has a solution to the problems which are produced by the inherent flaws of the capitalist system. Economic Stimulus programs are essential to address economic recessions, which are more complex and stubborn every next time. To endorse this argument, I will give an example of the Great Recession of 2007, caused by the sub-prime mortgage crisis (Reinhart & Rogoff, 2008). The 2006 recession, which was rightly dubbed as the Great Recession, lasted for a very long period, which reveals that ordinary monetary and fiscal measures are not enough to end recessions. Comprehensive economic stimulus programs, which are based on both potent monetary and fiscal policies, are required to address various kinds of economic challenges that slow down economic activity. President Obama introduced the American Recovery and Reinvestment Act ($787 billion stimulus package), which played a major role in mitigating the force of the 2006 economic recession (Leeper, Walker, & Yang, 2010). There are numerous other examples, where stimulus programs effectively address economic challenges, especially challenges caused by depression and recession.
In some countries, more sophisticated economic stimulus programs have been devised, which aim to bring change in a small area at the micro level.
Conclusion
From the discussion of the three subjects, it is apparent that the Spending, Taxes and Economic Stimulus are associated. From the discussion, it is also apparent that all are extremely relevant subjects, which directly affects the economy, in both the short and long run. We have learned that government spending is inevitable; however, it will produce better results only when it is methodical and rational. Similarly, we have learned that economic stimulus programs are important, as they are essential to address recession and depressions, caused by the inherent flaws of the capitalist system.
References
Carroll, L. (2016, January 13). Obama: US spends more on military than next 8 nations combined. Retrieved from http://www.politifact.com/truth-o-meter/statements/2016/jan/13/barack-obama/obama-us-spends-more-military-next-8-nations-combi/
International Monetary Fund. (2000). Government Spending, Rights, and Civil Liberties. International Monetary Fund.
Leeper, E. M., Walker, T. B., & Yang, S.-C. S. (2010). Government investment and fiscal stimulus. Journal of monetary Economics, 57(2010), 1000-1012.
Paletta, D. (2018, June 29). Trump calls for another round of tax cuts, further reductions to corporate tax rate. Retrieved from https://www.washingtonpost.com/news/business/wp/2018/06/29/trump-calls-for-another-round-of-tax-cuts-further-reductions-to-corporate-tax-rate/?utm_term=.22ad0396d092
Reinhart, C., & Rogoff, K. S. (2008, January). Is the 2007 US sub-prime financial crisis so different? An international historical comparison. Retrieved from https://www.nber.org/papers/w13761.pdf
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