U.S. fiscal policy - it will help the economy?

With concern about the impending recession, it appears that fiscal policy is becoming increasingly popular with politicians and policy makers. For example, the United States, a recession in the economy cause politicians across party lines to varying degrees the claims, the expansionary fiscal policy. As Nixon said the late 60th century, we are all Keynesians now?

How Fiscal Policy Works

Fiscal policy tries to influence governments in total demand, ADConsequently, impact on the economy and economic growth. When the government to increase domestic demand, want, they can cut taxes and increase public spending. Lower taxes increase the disposable income of consumers, we hope, so they consume more. Therefore, this results in higher economic growth.

On the flip side is the expansionary fiscal policy is that the government must borrow more public sector, so that it can be financed, it isTax cuts. Thus, the national debt and future interest rates, which are ultimately paid back to taxpayers will increase.

Why is fiscal policy can not work

Although in theory the government can affect the level of economic activity. In practice, it may be difficult to effectively manage the demand for the government about how much he wants.

1. Consumer confidence. If consumer confidence is low, can not cause the income tax and reduce spending. The reason is that they preferSave rather than spend the tax cut. Consequently, there is more on domestic demand. This scenario is likely, especially if taxes are cut to the rich, who use high-income lower marginal cost of D.

2. Crowding. This occurs when the higher public spending and borrowing in a corresponding reduction in private investment and spending. The reason is that the government more money, but borrow from the private sector. If the private sector to buy bonds, itmeans they have less income to consume and invest. That is why the government is diverting resources from the private sector the public sector, so there is no increase in size of the total demand.

Furthermore, the government, the more inefficient than the private sector. In addition, higher interest rates continue to increase borrowing crowding out private spending.

But this controversy Keynesians. They say that a real recession, the privateSector resources are not used sufficiently, so that the government is only intended to strengthen the economy.

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