This is an essay that was given as an optional assignment. We were allowed to choose any macroeconomic issue and write a 3 page single-spaced essay on it. It is for a lower-division economics class and this is a rough draft which I researched and put together over the last day or two. I knew very little on the subject going into the paper, so if I have fundamental concepts confused please correct me on it. I attempted to proof-read my own mistakes, but that rarely works and I'm stuck at work so I can't go to the writing center.
Thank you in advance! Any constructive feedback is welcome.
Obama Stimulus Package
You've heard about it on the news, it's a frequent topic of conversation among people from all walks of life, and many are saying it's one of the most controversial decisions of the Obama Administration. What exactly is the "Stimulus Package", what led to this call for government intervention, and how will it affect us? There are many questions stirring about, and rightfully so, but in order to properly address them, it's important to understand some of the factors which led to this. Let's consider the changes that have occurred over the last quarter century.
According to some views, which are debatable, the state of our economy and the recent trends in global markets resulted from a series of policy changes aimed at dealing with the collateral damage from two principle changes to market economies in the 1980's. During the dawn of the Reagan Administration, our country was facing, what was at the time, the most threatening recession since the Great Depression. The Gross National Product had fallen 2.5% and the Unemployment Rate had sky-rocketed over 10%, a historical high.
Although there were several factors which contributed to the recession in 1982, one of the most relevant for the high unemployment rate was an increasingly technical industry. Studies conducted by Thomas Hyclak at the Upjohn Institute for Employment Research in 2000 found that there were intriguing differences between the labor models found in '78-'79 and '87-'89. There was a marked trend which showed a reduction in wages for less-educated "blue-collar" workers and increased wages for skilled workers. Factories began to make an important shift in the methods they used for producing their goods. Advanced machinery replaced many manufacturing jobs, causing the trend in Hyclak's study, contributing to the rising wage inequalities, and laying off many "blue-collar" workers in the process. As our production staggered in the United States, economic rivals such as Japan and Germany took control over larger portions of global trade. This re-skilling of the labor force coupled with the increased dependency of American consumers on foreign products, set the stage for changes that would bring about policies which are relevant to the crisis we face today.
As a result of this increased factory automation and outsourcing, the ratio of wage to total income declined, which in turn reduced the level of purchasing power. Product markets suffered the burden of this effect as sales plummeted. Put simply, we had less money to play with. Our government then responded by attempting to stimulate consumer credit in hopes of off-setting these changes. By removing many restrictions on home mortgage lending institutions, they successfully compensated for the decrease in purchasing power, but did so by creating a bubble in the housing market.
In layman's terms, this theory suggests that we avoided a depression by placing the majority of our countries debt into consumers via the housing market and mortgage lending institutions. But when prices began to show signs of weakening towards the end of 2007, coupled with buyers who bought homes they had intended to refinance at lower rates, this housing bubble popped. People started losing the homes they couldn't afford and the mortgage lending institutions began to fall. This ultimately resulted in a "toxic" debt that is estimated at about 5-7 Trillion dollars.
Now that we understand a few of the factors which are likely to have played a role in bringing about the state of today's economic conditions, let's take a look at what exactly the "Stimulus Package", officially called the "American Recovery and Reinvestment Act", is meant to do. This stimulus package is an Act of Congress which was primarily influenced by President Obama and his administration. Stimulus is a general term which refers to a fiscal policy of spending government money in order to affect the economy, as seen in the Economic Stimulus Act of 2008, but Obama's stimulus is very different from the one we saw in 2008. The American Recovery and Reinvestment Act consists of funding for many long-term and a few short-term changes, including federal tax cuts, unemployment benefits, social welfare, education, health care, and infrastructure, whereas the Economic Stimulus Act of 2008 consisted primarily of tax rebates.
Basically, as Obama's campaign manager stated, "Obama believes the government should take steps to restore the confidence of consumers and businesses ... that we will not let things get worse and encourage them not to cut back further on their spending and investment." This means that the Act is intended to provide reliefs to those most in need, encourage economic activity within their communities, and do it all without "permanently" adding to the budget deficit. This is reflected, at least on the surface level, by the distribution of the nearly Trillion dollar plan, but experts are uncertain whether it will be effective. Some respected economists believe the plan will work, some believe it will not be enough, while many others believe it is too much. If there can be a consistent opinion among experts though, it would be that Obama's plan seems strikingly influenced by Keynesian economics.
During the 1930's, British economist John Maynard Keynes saw the Great Depression as the "failure" of Classical Theory. He disagreed with its main principle and proposed that, sometimes when prices adjust, demand doesn't always cater to the full employment level; there is untapped potential. Basically, Keynes was looking for a theory which would smooth out the times when the business cycle slumps. Through government spending, and thus inflation/deficit, fiscal policy could affect the economy. Therefore, a general rule could be observed in the Keynesian model, as inflation increased so did output and employment.
Keynesian economics saw most of its success from the time after World War II all the way up until the oil crisis of 1973. But during the troubled economics of the '70s, the economy was experiencing increased inflation with rising unemployment levels; something that, at the time, should not have been possible according to the Keynesian views. As a result of this stagflation, the trend of economists abandoned Keynesian views in favor of more classic views.
This fact is one of the criticisms that the opposing experts of Obama's plan argue. An ad, funded by the Cato Institute and signed by 200 economists whom opposed Obama's plan, stated, "... we the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s... To improve the economy, policymakers should focus on reforms that remove impediments to work, savings, investment, and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth." As this debatable statement claims, Keynesian economics did not work in the past and there is little evidence to support the claim that it will work now. If this is true, adopting a fiscal policy which further places huge amounts of unnecessary debt could prove disastrous at worst or ineffective at best.
Aside from the Keynesian argument, many critics simply believe that the Stimulus Package won't address the underlying fundamental causes of the depression. They claim that it is more of a temporary band-aid cooped with some long-term infrastructure and social services funding. The problem that these critics foresee is that the benefits will be temporary in the short-run and inconsequential in the long-run. Meanwhile, the detrimental effects of the increased debt and government intervention could easily outweigh the benefits yielded. Both of these opinions can be supported by the Congressional Budget Office (CBO) Report that was sent on February 4th, 2009.
In the CBO Report, summarized by Douglas W. Elmendorf, they hypothesized the short-run and long-run effects of the stimulus package. In the short-run, they affirm the uncertainty of the effect, but go on to state that there should at least be temporary positive effects as a result of increased aggregate demand. On the contrary, the long-run effect of the program will be increased government debt which will "crowd out" private investors. This means that people will have a larger portion of their assets in government bonds rather than in savings accounts which banks could have otherwise given out loans to private investors with. However, there are also many long-term investments which will be sponsored by these "crowded-out" funds. The CBO Report recognizes that these investments could offset the lost productivity and supporters of the plan believe it will do just that.
Analyzing the determinants which have led to this recession, and what Obama's plan intends to accomplish, there are valid arguments both opposing and supporting it. With some parties arguing for less intervention and the removal of restrictions, while other parties want the government to curve the sluggish demand of a deep recession, it's simply a question of what you believe the government's role should be. Only time will tell which approach, or if a new unforeseen one, will prove right.
Thank you in advance! Any constructive feedback is welcome.
Obama Stimulus Package
You've heard about it on the news, it's a frequent topic of conversation among people from all walks of life, and many are saying it's one of the most controversial decisions of the Obama Administration. What exactly is the "Stimulus Package", what led to this call for government intervention, and how will it affect us? There are many questions stirring about, and rightfully so, but in order to properly address them, it's important to understand some of the factors which led to this. Let's consider the changes that have occurred over the last quarter century.
According to some views, which are debatable, the state of our economy and the recent trends in global markets resulted from a series of policy changes aimed at dealing with the collateral damage from two principle changes to market economies in the 1980's. During the dawn of the Reagan Administration, our country was facing, what was at the time, the most threatening recession since the Great Depression. The Gross National Product had fallen 2.5% and the Unemployment Rate had sky-rocketed over 10%, a historical high.
Although there were several factors which contributed to the recession in 1982, one of the most relevant for the high unemployment rate was an increasingly technical industry. Studies conducted by Thomas Hyclak at the Upjohn Institute for Employment Research in 2000 found that there were intriguing differences between the labor models found in '78-'79 and '87-'89. There was a marked trend which showed a reduction in wages for less-educated "blue-collar" workers and increased wages for skilled workers. Factories began to make an important shift in the methods they used for producing their goods. Advanced machinery replaced many manufacturing jobs, causing the trend in Hyclak's study, contributing to the rising wage inequalities, and laying off many "blue-collar" workers in the process. As our production staggered in the United States, economic rivals such as Japan and Germany took control over larger portions of global trade. This re-skilling of the labor force coupled with the increased dependency of American consumers on foreign products, set the stage for changes that would bring about policies which are relevant to the crisis we face today.
As a result of this increased factory automation and outsourcing, the ratio of wage to total income declined, which in turn reduced the level of purchasing power. Product markets suffered the burden of this effect as sales plummeted. Put simply, we had less money to play with. Our government then responded by attempting to stimulate consumer credit in hopes of off-setting these changes. By removing many restrictions on home mortgage lending institutions, they successfully compensated for the decrease in purchasing power, but did so by creating a bubble in the housing market.
In layman's terms, this theory suggests that we avoided a depression by placing the majority of our countries debt into consumers via the housing market and mortgage lending institutions. But when prices began to show signs of weakening towards the end of 2007, coupled with buyers who bought homes they had intended to refinance at lower rates, this housing bubble popped. People started losing the homes they couldn't afford and the mortgage lending institutions began to fall. This ultimately resulted in a "toxic" debt that is estimated at about 5-7 Trillion dollars.
Now that we understand a few of the factors which are likely to have played a role in bringing about the state of today's economic conditions, let's take a look at what exactly the "Stimulus Package", officially called the "American Recovery and Reinvestment Act", is meant to do. This stimulus package is an Act of Congress which was primarily influenced by President Obama and his administration. Stimulus is a general term which refers to a fiscal policy of spending government money in order to affect the economy, as seen in the Economic Stimulus Act of 2008, but Obama's stimulus is very different from the one we saw in 2008. The American Recovery and Reinvestment Act consists of funding for many long-term and a few short-term changes, including federal tax cuts, unemployment benefits, social welfare, education, health care, and infrastructure, whereas the Economic Stimulus Act of 2008 consisted primarily of tax rebates.
Basically, as Obama's campaign manager stated, "Obama believes the government should take steps to restore the confidence of consumers and businesses ... that we will not let things get worse and encourage them not to cut back further on their spending and investment." This means that the Act is intended to provide reliefs to those most in need, encourage economic activity within their communities, and do it all without "permanently" adding to the budget deficit. This is reflected, at least on the surface level, by the distribution of the nearly Trillion dollar plan, but experts are uncertain whether it will be effective. Some respected economists believe the plan will work, some believe it will not be enough, while many others believe it is too much. If there can be a consistent opinion among experts though, it would be that Obama's plan seems strikingly influenced by Keynesian economics.
During the 1930's, British economist John Maynard Keynes saw the Great Depression as the "failure" of Classical Theory. He disagreed with its main principle and proposed that, sometimes when prices adjust, demand doesn't always cater to the full employment level; there is untapped potential. Basically, Keynes was looking for a theory which would smooth out the times when the business cycle slumps. Through government spending, and thus inflation/deficit, fiscal policy could affect the economy. Therefore, a general rule could be observed in the Keynesian model, as inflation increased so did output and employment.
Keynesian economics saw most of its success from the time after World War II all the way up until the oil crisis of 1973. But during the troubled economics of the '70s, the economy was experiencing increased inflation with rising unemployment levels; something that, at the time, should not have been possible according to the Keynesian views. As a result of this stagflation, the trend of economists abandoned Keynesian views in favor of more classic views.
This fact is one of the criticisms that the opposing experts of Obama's plan argue. An ad, funded by the Cato Institute and signed by 200 economists whom opposed Obama's plan, stated, "... we the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s... To improve the economy, policymakers should focus on reforms that remove impediments to work, savings, investment, and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth." As this debatable statement claims, Keynesian economics did not work in the past and there is little evidence to support the claim that it will work now. If this is true, adopting a fiscal policy which further places huge amounts of unnecessary debt could prove disastrous at worst or ineffective at best.
Aside from the Keynesian argument, many critics simply believe that the Stimulus Package won't address the underlying fundamental causes of the depression. They claim that it is more of a temporary band-aid cooped with some long-term infrastructure and social services funding. The problem that these critics foresee is that the benefits will be temporary in the short-run and inconsequential in the long-run. Meanwhile, the detrimental effects of the increased debt and government intervention could easily outweigh the benefits yielded. Both of these opinions can be supported by the Congressional Budget Office (CBO) Report that was sent on February 4th, 2009.
In the CBO Report, summarized by Douglas W. Elmendorf, they hypothesized the short-run and long-run effects of the stimulus package. In the short-run, they affirm the uncertainty of the effect, but go on to state that there should at least be temporary positive effects as a result of increased aggregate demand. On the contrary, the long-run effect of the program will be increased government debt which will "crowd out" private investors. This means that people will have a larger portion of their assets in government bonds rather than in savings accounts which banks could have otherwise given out loans to private investors with. However, there are also many long-term investments which will be sponsored by these "crowded-out" funds. The CBO Report recognizes that these investments could offset the lost productivity and supporters of the plan believe it will do just that.
Analyzing the determinants which have led to this recession, and what Obama's plan intends to accomplish, there are valid arguments both opposing and supporting it. With some parties arguing for less intervention and the removal of restrictions, while other parties want the government to curve the sluggish demand of a deep recession, it's simply a question of what you believe the government's role should be. Only time will tell which approach, or if a new unforeseen one, will prove right.