Fiscal Stimulus or expansionary Fiscal Policy has been a subject of controversy, since it was introduced, by amending classical economic models, to mitigate ramifications of Great Depression. It transformed classical capitalist models into Keynesian Economic Models, by introducing Fiscal Instrument. It allowed governments to do expenditure and adjust tax rates, with the objective of generating employment and intensify economic activity. Today, almost all political-economic systems employ fiscal instruments to realize short and long-run objectives. However, in some political-economic systems, such as the United States, governments are sensitive regarding the employing of expansionary fiscal policy. Much it has to do with the challenges, which are associated with the expansionary fiscal policy (Langdana 171).
Argument In Favor of Fiscal Policy
Contemporary economies have two prime objectives, which are 1) employment and 2) Economic growth. An economy uses various kinds of economics tools and instruments, at macro-level, to maintain a certain employment level and to ensure sustainable economic growth. Economies/governments/states are compelled to take these measures because capitalist systems are inherently unsalable, and recessions are periodic. Therefore, governments or economies are compelled to take measures to address these issuers. For instance, during a recession, consumption declines; this results in a production surplus that reduces both prices and employment. Employment is not only an economic challenge but also a political concern, which directly affects governments. Therefore, it becomes quite essential for the governments/economies to take measures (FRED).
Fig. 1. FRED.” Unemployment Rate: 20 years and over.” Economic Research. Fred Economica Date, 6 October 2017. https://fred.stlouisfed.org/series/A191RL1Q225SBEA.
(Note: From the graph, it is apparent that unemployment is periodic, as data is stationary, despite being seasonally adjusted.)
Also, because of extraordinary monetary conditions, such as Liquidity trap reliance on expansionary fiscal policy increases. In such extraordinary conditions, it becomes important for economies to employ expansionary fiscal policy. In comparison to monetary policy, the Fiscal policy can produce results at a quicker pace, which makes it preferred instrument, especially for the developing economies, where political objectives are embedded with economic objectives.
As another major concern, for a/an economy/state/government is growing. Therefore, the fiscal instrument is also used to manage growth. From the graph, it is evident that growth rate varies, and it is influenced by different periods, such as boom and recession. Therefore, during different periods, governments have to amend its fiscal policies, according to new realities. For instance, when recession sets, which slows down economic growth and, in some cases, the annual GDP growth turns negative, governments use fiscal tools to overcome this serious issue (FRED).
Fig. 2. FRED.” Real Gross Domestic Product.”Economic Research. Fred Economica Date, 28 September 2017. https://fred.stlouisfed.org/series/A191RL1Q225SBEA.
Argument Against Fiscal Policy
One of the real issues related to fiscal policy is lag. It implies that most of the time, governments take enormous time to realize that the economy needs fiscal stimulus, which is a fiscal stimulus that mislays its relevance. Also, the lags related to the devising of expansionary fiscal policy and its implementation further complicates the issue and because of the relevance of fiscal instrument further, diminishes (Deepa).
Another challenge, related to fiscal policy, is the Crowding-out Effect. It implies that because of the excessive spending by government, with the intention to increase employment and expand GDP, which results in more purchases. As a consequence, Treasury has to sell more bonds, decreasing the price of bonds and increasing interest rates, which are negatively related to investment. This increase in interest rates adversely influences the volume of investment in an economy, which makes it a controversial subject.
Contemporary Studies
Most of the studies infer that expansionary fiscal policy or fiscal stimulus has a positive impact on employment level and GDP growth. Despite the statistical challenge of endogeneity, in these studies that have studied that impact of fiscal stimulus on employment and growth, most of the studies concluded that Fiscal Stimulus could produce results, which it assumes to produce (Matthews).
The most recent economic recession was the 2007 Subprime mortgage Crisis, which was dubbed as The Great Recession. During this period, Obama Administration intended to use fiscal stimulus; however, it was strongly opposed by Republics. After the implementation or use of Fiscal Stimulus, it was thoroughly studied and discussed. Out of five most prominent econometric studies, three concluded that Fiscal Stimulus had a positive correlation with employment and growth and two inferred that relation in ambiguous (Matthews).
In developing countries too, because of the ambiguous role of fiscal stimulus, it is a matter of great controversy. For instance, in India, it has become a matter of great political concern and it opposed because of its 1) ambiguous role in the economy and 2) budget deficit it results. Though, the perceived benefits motivate for its use (Bhattacharya).
Conclusion
From this detailed discourse and statistical evidence, we can draw some conclusions regarding various subjects which we covered in this paper. It is apparent from the graphs that both unemployment and GDP growth are periodic (data is stationary), which necessitates the use of Fiscal Stimulus. Contemporary studies, about the results of Fiscal Stimulus, it is evident that Fiscal Stimulus can produce those results, which it is assumed to produce. However, it must also be acknowledged that econometric evidence, in favor of Fiscal Stimulus, is weak though not ambiguous.
Fiscal Policy and use of Fiscal instruments would remain a subject of controversy for many years to come; however, we would not see shunning of this policy in the near or distant future. It is because of the liberal-economic models, which are reformed versions of capitalist economic models, are prone to recessions. Therefore, there will always be a need for a fiscal stimulus to meet political-economic objectives. Also, the definitive conclusion regarding the effectiveness of fiscal instrument depends on a better econometric test/model; therefore, political-economic thoughts would have to wait for a longer period to pass definitive judgment.
Work Cited
Bhattacharya, Pramit. “The argument against a fiscal stimulus package for the Indian economy.” Livemint. Livemint, 25 October 2017. Web. 25 October 2017. http://www.livemint.com/Politics/lPjpxBbK9AfidjxM3L6UgO/The-argument-against-a-fiscal-stimulus-package-for-the-India.html.
Deepa, Pargyan. “Top 13 Limitations of Fiscal Policy.” 7 October 2017. Web. 25 October 2017. Economics Discussion. Economics Discussion, http://www.economicsdiscussion.net/fiscal-policy/top-13-limitations-of-fiscal-policy/4702.
FRED.” Real Gross Domestic Product.”Economic Research. Fred Economica Date, 6 October 2017. Web. 25 October 2017. https://fred.stlouisfed.org/series/A191RL1Q225SBEA.
Langdana, Farrokh. Macroeconomic Policy: Demystifying Monetary and Fiscal Policy. New York: Springer Science & Business Media, 2009 .
Matthews, Dylan. “Did the stimulus work? A review of the nine best studies on the subject.” The Washington Post. The Washington Post (WP LLC), 24 August 2011. Web. 25 October 2017. https://www.washingtonpost.com/blogs/ezra-klein/post/did-the-stimulus-work-a-review-of-the-nine-best-studies-on-the-subject/2011/08/16/gIQAThbibJ_blog.html?utm_term=.61f7302360b8.
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