Austerity and Stimulus Dispute - Assignment Example

? of Learning: ‘Austerity’ and ‘Stimulus’ Dispute Introduction Austerity or stimulus has been the most common debate heating headlines in most western countries. For example, Britain's coalition government, Germany and the Tea Company located in the USA support the austerity topic. The main idea behind all this is simple; if you got a lot of debt then you should stop spending to avoid a financial crisis. The argument emerges when the government hinders the economy growth due to its cutbacks. The cutbacks will mostly be brought by reduced tax revenues. A good example is what is being witnessed in Greece where the economy has been observed to decrease by 5% every year. Governments should adapt to the idea of spending to boost the economy and also concentrate on balancing the books as the private sector facilitates the economy rise. It is strange how the people who believe in austerity see this as an impossible move and believe that you can not spend when you got a debt. Keynes Theory The stimulus vs. austerity argument arises the debate about if the money supply should be increased or reduced. The difference between function one and function three views of money brings up a big debate. Also the creditors and debtors have a conflict of interest here. Creditors prefer the level three. They are more concerned with the store of value and want their money to increase value and be worth something when they are paid back. Debtors propose to earn the less money and pay back real terms. Multiplier The battle between austerity and stimulus mainly bases around money as a vital factor that greatly determines there strength. Money functions are sub-divided into three which include: a medium of exchange, a unit of account and a measure store of value. These three functions bring out the difference between the stimulus and austerity. In the first function where money acts as a medium of exchange, it is a physical representation of a transaction. In such a case, money can be represented in the form of coins, golden bullions notes and even cowrieshells. Whereas at the same time the medium of exchange may not be physical like transferring money from one bank account to another through a BACS transfer. The digital tokens are later transferred between two computer systems (Lendman, 2013, p. 10) Money also functions as a unit of account where it is basically used as a common unit for measuring the difference in value between two commodities or more. For example in barter trade economy, you can exchange two sheep for three goats whereas in the money economy you can value the goats for six shillings. Money functions as a unit of account in that it tells what things are worth. For example a sheep is worth three shillings and a goat at two shillings. The other function of money is as a store of value, in this sense, money is attributed by the fact that it cannot be spend immediately it is gained. The view of money as a physical medium of exchange improves the economy positively. An increase in physical exchanges increases the level of trade thus leads to quick economy growth. If money is perceived as a store of value then it will negatively contribute to the economy .The less the amount of money stored, the more valuable it becomes. Restriction on the amount of money in supply increases its value. Problems of Applying A Keynesian Stimulus Everyone would agree with the fact that we are facing an economic crisis. Some people believe that this situation is caused by the government giving promises it can not deliver in the long run and the best way to solve this remedy is by austerity. Whereas other people think that it is due to the private sector inability to create jobs and growth and prefer stimulus .The stimulus folks point to Europe to indicate that austerity has failed. This did not only cure economic problems but it was also rejected at the polls. On the other hand austerity switches blame to the United States and argue that stimulus was disguised. It is strange with all the money spent, the US has had only a weak and anaemic recovery much fragile than what followed the other recessions. Some individuals may appeal to both camps but the issue here is to achieve and build hope by coming up with the proposals outlined that may result to the worst aspect of both stimulus and austerity. It may seem like a natural debate but it also affects political boundaries and makes it harder to formulate (Lendman, 2013, p. 7). The real austerity means shrinking governments and avoid budget games .This means cutting spending, laying off workers, getting the government out of nonessential areas, cutting regulation, and privatizing of assets. Taxation is a very complicated way of addressing this matter. In one hand you may wish to reduce the economic distortions of the government or freeze the amount of debt and unfunded projects. The best option is to reduce marginal tax rates but increase total tax revenue by expanding the areas that contribute most tax. US have tried to implement all kinds of stimulus but was unsuccessful. There were bailouts, direct payments to individuals, payments to state and local governments to hire more workers, investments in “shovel-ready” projects, subsidies and guarantees for venture capital projects, tax breaks, foreclosure relief, quantitative easing and low interest rates (Lendman, 2013, p. 12). However, the total money in the long run was minimal. With time a lot of pages were formulated for new regulation and were well adapted to the need for expansions. Problems With Dealing With Government Debt Whereas many stimulus advocates preferred a better program than that, some think the expenditure should have been increased while others think they should have been a faster spending, getting into the hands of good investors than trying slower and more unrealistic programs. However others think very differently but all in all a bigger stimulus program has never emerged in history and no experts have come up with the idea of creating one with more efficiency. If austerity and stimulus were greatly different there insight would not be hugely felt. But there are areas where they appear similar. For example, the reduction of marginal tax rates to promote the economy while lowering the setbacks introduced by the government. People do fewer complicated avoidance schemes and cheat less; enforcement costs are lower; fewer people go to jail; and money is saved on tax accountants and lawyers that are used productively (Lendman, 2013, p. 9). Results The elimination of restrictions that hinder the growth of creativity is another example. When the economy is at jeopardy, new ideas are needed to restore the situation. A reduction in employment and resources calls for the need of new businesses. As Austerity proposes the reduction in these regulations, stimulus on the other hand advocates for the increase in economic activity that are productive (Lendman, 2013, p. 4). Austerity reduces the power of the government and makes it smaller that is why the political field does not propagate it. It greatly reduces the centrist politician’s power and they obvious don’t like it because they use there power to get favors to their followers. Conclusion The main demerit of the stimulus is that it leads in disruption and innovation. The economy may increase in relation to growth but some individual’s interests may not be met. The center may contact austerity that this means that less taxes on the center and not a smaller government but when it opts to call stimulus this means politics which target special interests. Whereas, when it calls for "civility" and "bipartisanship", that transcends authority to the center than it is dealt with by the extremes. Bibliography Lendman, S., 2013. Austerity When Stimulus Is Needed, London Guide, London Read More