What kind of fiscal policy can we propose if we face:

A sluggish economy with : 1. Looming Debt.

2. High Unemployment.

3. Low Inflation rate from the recent recession.

What kind of Fiscal Policy can we propose? "We have to be mindful of the risk that can take place from, expansionary/contractionary policies."

(With only Fiscal Policy allowed)


-My Group decided theses to address the issue as best as we can.

1. Spend more on renewable energy. (increase employment/ depend less on exports?)

2. Reduce health care for preventative. (maybe support medical student?)

3. Rehabilitation of prisoners that have non-violent offenses. (Lower gov't spending/ debts?) My group also thought about legalizing marijuana.

"Though I'm against it for personal (Veteran) reasons. Majority of the drugs we found in Afghanistan were used to finance terrorist group.. although legalizing it would mean..less income for the terrorist? So I'm not sure."

4. Give incentives/ tax breaks to American companies that use American goods instead of foreign exports. (Increase GDP?)


Will these plans work? I feel like some will contradict each other. (e.g. #4. won't companies just move to other countries?)

I apologize for such a long question, I've been a little overwhelmed by all the material I found online.

Expert Answers

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Let me start by talking a little bit about typical answers to this question.  I will then move on to address your specific suggestions.  The most typical answer to a question like this would simply be to use an expansionary fiscal policy.  That would include increased government spending and/or reduced taxes.  Liberals would want to decrease taxes on the middle class and the poor so that they can spend more money and increase aggregate demand.  Conservatives would be more likely to want to decrease taxes on the rich and on corporations.  They would argue that this will stimulate aggregate supply.

As to your group’s suggestions, #1 is a typical liberal idea because it provides jobs while moving the economy in a “greener” direction.  It would certainly create jobs and could eventually reduce the amount of oil that we import.  However, conservatives would point out that we might be spending our money on things that will not be economically feasible.  Renewable energy might not be at all competitive with fossil fuels at this point.  If so, your plan would end up spending government money for projects that would not help the economy past the short term increase in jobs for people who build the projects.

Suggestion #2 seems contractionary.  If you spend less on preventative health care, you will be putting less government money into the economy.  This would reduce aggregate demand because you wouldn’t be putting money in the pockets of doctors and other medical personnel and therefore those people would be spending less. 

Suggestion #3 would certainly save money.  This would allow the government to possibly cut taxes.  It might also improve aggregate supply because it would keep more workers in the work force and out of prison.  Legalizing marijuana would do the same and might also bring more revenue to the government in the form of taxes on the marijuana that is sold legally.

Suggestion #4 is, in my opinion, too complicated to work well.  You would have to monitor exactly how much in the way of tax breaks each firm deserved (presumably based on how many American-made goods they bought).  You would have to have all sorts of rules about what counts as an American-made good.  Companies would have to go through all sorts of paperwork to comply with the law.  Conservatives would suggest simply reducing corporate taxes on all corporations so that they could get the benefits of lower taxes without all of the red tape that would be involved in this proposal.

I would suggest thinking about some plans that would build our general capabilities as a country.  Maybe spend more on student loans so we get more people going to college and to good technical schools.  Maybe give more tax breaks for research and development.  These sorts of things would increase our overall capabilities without having the government try to pick which industries to favor (as in your plan #1.)

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