Our government has two choices when it comes to stimulating our economy. They can either make tax cuts, which will give money back to the people (consumer), which the government hopes they will spend and put back into the economy. Or they can increase government spending, which will put money back into the economy by funding projects, but in turn will continue to increase our government deficit and lead to inflation. Which way will be more effective in providing the best stimulus for the economy? The Government fears people will choose to save the money they’re receiving from tax breaks, so then it’s all on the Government’s back to get the economy stimulated. So, if we’re relying on the Government to stimulate the economy, they have to do this by continuing to borrow money (by issuing treasury notes), which leads to inflation, and we’ll see interest rates rise, and all of that debt becomes very expensive. Even though the government has to print the money to spend the money, which creates more debt, it still gets the money back in the economy, creating more jobs and circulating profits. If we don’t stimulate the economy, the bigger fear is that we enter a period of deflation, where the value of everything declines. In that situation we would have record unemployment, catastrophic real estate foreclosure rates, and a further collapse of the financial markets. Therefore, as Eggertsson points out, the lesser evil and best economic advantage is to support government spending.
Texas Government - Local and State
14 years ago
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