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Should the government increase spending to get out of a recession?

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Introduction

'The government should not increase spending to get the economy out of recession.' Discuss. A recession is a terrible thing. Unemployment rates soar as firms close down, economic growth slows due to a lack of demand, and with consumption declining, desperate consumers seek help from the government to sort the economy out. One method of doing so involves a hefty fiscal stimulus, known in the trade as 'government spending'. An increase in government spending was a method famously proposed by arguably the most influential macroeconomist of the twentieth century - John Maynard Keynes. His policies became known as Keynesian economics, and have notably been implemented in 1937, to assist Franklin Roosevelt's New Deal program during the great depression1. Keynes argued government should exploit its massive financial power to force the economy into submission and encourage economic activity2. Keynesian economists call this theory "counter-cyclical demand management," because it attempts to effectively control aggregate demand3. How, then, does this theory work? Government spending consists of public sector pay, publicly provided goods (such as defence and the NHS), transfer payments and debt interest4. An increase in transfer payments - money taken from the rich, and given to the poor - will increase demand for the necessities in life, such as food and water. ...read more.

Middle

Mr Obama also draws on the historical elements of Keynesian demand-management as a policy to draw an economy on of a recession. The private sector is more much efficient than any, because of the profit incentive driving innovation and businesses constantly forward. One can conclude Mr Obama has hit the nail on the head seeking to encourage private enterprise, but there is another, more effective way of doing so - lower corporate taxation13. By lowering taxation, the incentive to an entrepreneur thinking of setting up a proprietorship but has not done so due to the off-putting nature of losing a proportion of profit to the government is drastically increased14. In order to promote competition and achieve efficiency in the market, the aforementioned quasi-fiscal/supply-side policy must be implemented. Small business growth is a key driver of economic growth15. Granted, globalised businesses provide a healthy source of employment across the world, but with their monopoly power, they can control the labour market by exerting dominance in harsh time16. The fad of 'McDonaldisation'17 provides jobs for over 1.5million people18. Unfortunately, the negative externalities arising from over-consumption of demerit goods is a source of market failure - and a Big Mac may well be labelled a demerit good19. ...read more.

Conclusion

It needs to lower interest rates, assure consumers the economy is not in serious trouble too27. Conversely, governments need not to run a budget deficit at all. Basically, cutting interest rates will lower mortgage payments and improve the incentive to borrow and invest28, thereby increasing disposable income and throughout the accelerator effect, fuel investment levels29. Surely this policy is better than the volatile, medium-term effects of inflationary fiscal methods. Ultimately, the government should rely on 'safer' more effective options opposed to increasing spending, as monetarist and supply-economists will agree. Adam Denny - Year 12. _____________________________________________________________________________________ Bibliography: 1. http://www.takeonit.com/question/264.aspx 2. Economics: A Students Guide (2001) 3. http://iws.ccccd.edu/kwilkison/Online1302home/20th%20Century/DepressionNewDeal.html 4. http://tutor2u.net/economics/content/topics/fiscalpolicy/public_spending.htm 5. http://tutor2u.net/economics/revision-notes/as-macro-consumer-spending-and-saving.html 6. Cambridge Advanced Economics: Economics for AS (2005) 7. http://bentoncrane.net/2009/02/07/governments-3-sources-of-revenue/ 8. The laws of trade 9. http://www.dooyoo.co.uk/bank/h-f-c-bank/1084900/ 10. http://www.personal.kent.edu/~cupton/bbamacro/ma02.htm 11. http://www.takeonit.com/question/264.aspx 12. http://blogxilla.com/blog3/2009/01/21/the-most-powerful-man-in-the-world/ 13. Anforme AS-level Economics (2008) - Supply-side policy 14. http://www.brookings.edu/papers/2001/1005taxes_gale.aspx 15. http://www.inc.com/welcome.html?aw=600&ah=600&destination=http://www.inc.com/news/articles/2008/09/employment.html 16. Labour and Monopoly Capitalism: The Degradation of Work in the Twentieth Century - Harry Baverman 17. http://www.mcdonaldization.com/whatisit.shtml 18. http://www.mcdonalds.ca/en/aboutus/faq.aspx 19. Heinemanm Economics for Edexcel - Market Failure (2003) 20. http://www.economist.com/opinion/displayStory.cfm?Story_ID=8554819 21. Anforme AS-level Economics (2008) - fiscal policy 22. http://www.thinkexist.com/quotations/economics/ 23. http://www.philforhumanity.com/Recession_Suggestions.html 24. http://en.wikipedia.org/wiki/Recession 25. http://news.bbc.co.uk/1/hi/uk/8046700.stm 26. European Central Bank - Fiscal Policy in Real Time (2008) 27. Economics: A Students Guide (2001) 28. http://www.nytimes.com/2009/02/17/washington/17housing.html 29. http://www.economicshelp.org/dictionary/a/accelerator-effect.html My information: Name: Adam Denny School: Ashton Sixth Form College Teacher: Kay Brookes, Yvonne Bailey DoB: 08.03. ...read more.

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