The federal government’s tool kit for addressing business cycle fluctuations.

In chapter 16 we learned about fiscal policy –the federal government’s tool kit for addressing business cycle fluctuations. In chapter 12 we learned that business cycle fluctuations are caused by changes in aggregate expenditure. One implication of this idea is that if we are in a recession, it is because total spending has decreased. Therefore, if we want to get out of a recession, total spending needs to increase. Chapter 16 offers two ways to stimulate total spending –through tax cuts or increases in government spending.

Typically, Republicans favor tax cuts, while democrats favor increases in government spending. There are economic rationales for both positions. Tax cuts put money into the pockets of consumers, who are better than the government at determining how resources should be allocated –this promotes “allocative efficiency” (from chapter 1). On the other hand, tax cuts have a lower multiplier effect than increases in government spending. This means that we get more economic stimulus from a given dollar value of government spending than the same dollar value in tax cuts.

The tradeoff here is between more efficiency (with tax cuts) vs. more economic stimulus (with government spending). Differences of opinion on this matter are cause for heated political debate and overblown political rhetoric.

So what do you think? Do you prefer economic stimulus from tax cuts or increases in government expenditure? Please post a response about the issue and support it with economic reasoning, information you learned from reading the chapter material, and with internet research (post a link to at least one article or website that passes the CRAAP Test (Links to an external site.)). Then, please respond to the position of at least one classmate, and use research evidence to try to convince the individual (and the class) that you are correct. Your response can be to someone who shares your view, but it will probably be more fun to debate someone on the other side of the issue.