The reason that this is a problem can be explained through this simple GDP explanation. The basic GDP equation includes the amount that the government spends on infrastructure and the rechanneling of funds into the private sector. In this model, the investment that a government makes in preschool programs creates more jobs and better opportunities for young students. This directly affects the productivity curve of the populace therefore making it into an economic activity.
On the other hand, the new military weapon system is also another way of increasing the GDP because it creates more jobs and increases government spending in that economic sector. The spending on healthcare and the controls that are placed on the internet can also be considered as economic issues because they directly and indirectly affect the amount of money that people will spend on these activities. Stringent government regulations on the internet could stifle its economic growth.
Alternatively, by subsidizing the cost of healthcare, the government could make it more available and increase human capital investment. Since the GDP of the government will be used to deal with the potential property damage should a single calamity occur in any one of these areas, the rest of the economy will suffer because the funds that are needed will be diverted to relief efforts. The government is currently offering a number of subsidies to these companies and is therefore encouraging people to allow the government to bear the burden.
This is a serious economic flaw that must be addressed. One of the problems, which are related to the first item, is the low savings rate which results in the reduction of social security. The lower savings rate means that there could be a shortfall of nearly four trillion dollars (US$ 4 trillion) by the year 2017. People are not inclined to place their savings in what they consider low return policies and instead have shifted to greater consumer spending. While in theory this could be good for the economy, in the long run, this could result in more trouble.
With people less inclined to invest their funds or to save their earnings, there is a decrease in the amount of capital funds that are available in the market. This in turn results in a slowdown of new comers into the market due to the scarcity of capital funds. Greed as a regulator in a capitalist market functions in a similar way. In what is termed as the “balancing mechanism” of greed, the capital that is infused into any industry or business will always look for the cheapest source. Given this behavior, it is logical to assume that this capital will go to places where labor and materials are cheap.
This low cost will not remain forever and will eventually force the prices of the factors of production up and by doing so removing the advantage that was sought after in the first place. This in effect levels the playing field and regulates the market. The recent decrease in savings, however, will not create this scenario and will instead force the capital elsewhere and adversely impact the American economy. Finally, the most serious problem is the large dependence that the United States has on oil. The recent economic situation of the United States could arguably be better were it not for the exponential increase of oil prices.
As the world’s largest importer of oil, the United States spends a large amount of its funds on energy and energy alternatives. It can even be argued that the total cost of most goods produced is attributed to oil costs. The problem here therefore is the reliance that the United States economy has upon oil imports. Any slight increase can drastically affect the American economy as we can see at present. Conclusion: In conclusion, the basic economic principles from the Keynesian era dictate that changes in the monetary and the fiscal policy directly impact inflation and unemployment.
The reason for this is that an increase in money supply means that there is more currency in the market. This in turn leads to more spending which drives up the prices of goods. This can be understood in the context of basic supply and demand. This relation to unemployment, however, is quite different and may depend on many factors. Simplistically speaking, however, unemployment can be reduced by a change in either monetary or fiscal policy that encourages the growth of small to medium scale businesses.
By decreasing interest rates, the money supply increase thus allowing individuals and firms more access to capital that is need to run their own businesses. One way to look at this problem in the real world setting is to discuss the impact of such in relation to the current economic stimulus that the United States government has planned. As shown by certain researchers, the projected loss of jobs and increase in unemployment rate is not necessarily affected by any economic stimulus package.
This is the reason why the question on whether or not the package should be higher is not really relevant. Loss of jobs can be attributed to the economic fundamentals of the United States economy such as the shift in production facilities to other countries. This would mean that changes in monetary and fiscal policy would not necessarily have a direct effect on the unemployment rate. So while current theories show that monetary and fiscal policies may indeed impact inflation and unemployment, such is not always the case in certain situations as shown in the example provided.
The basics such as solid economic fundamentals must always be considered when looking at the impact of such changes to see if they can really attain the desired effect.
Baker, D. (2005). The Federal Reserve Board – The Most Important Source of Poverty in the United States Center for Economic and Policy Research Economics Seminar Series. Baumol, W. and Blinder, A. (2006) Macroeconomics: Principles and Policy, Tenth edition. Thomson South-Western, United States Davidson, Scott. (2003). Economics: Perfect Competition and Monopolistic Competition. 2nd Series. Bantham Books: 103-105.