Econ 4020 reaction 12-13 - Term Paper Example

Effective Government Fiscal Policy for the USA Economy Since the year 2007, the USA economy has been operating under a great recession. As a result, the federal government under the stewardship of President Obama has exploited a number of economic policies to aid in averting the worrying situation. In line with the forgoing debate about the fate of USA economy, this write-up finds it prudent to inject a visionary economic school of thought that defines how full employment can be achieved through redesigning government fiscal policies.

Beginning the period just after the revolutionary war (1790) to date, the USA government has always had debts. However, the total nation debt has kept on fluctuating with different administration implementing significantly different economic policies. In 1919, the participation of the USA in the World War I escalated the total national debt from $6 billion to slightly above $27 billion. The period marking 1920s was characterized by increased levels of private sector spending. As a result, the government generated excess revenue that lead to reduction of the national debt to $16.9 billion. Rate of unemployment also reduced drastically; the nation almost achieved full employment.

Unfortunate, in 1929, another great recession invaded the economy as the private spending started to decline. The rate of unemployment too increased (Davidson, 2010).The total national debt continued to increase and by 1936, its ratio to GDP was approximately 4:6. Notably, irrespective of the high debts the USA economy still grew significantly. The period marking World War II (1941-1945), the USA government expenditure drastically increased due to the massive funding of the war. What is interesting is that while the total national debt increased by over 500%, the GDP also doubled.

It is recorded that the period that marked the ending of World War I saw each American household have improved standards of living. There was not negative effect of the war as was speculated.The lesion learnt from the historical economic review of the USA is that there should not be fear in spending huge amount of money that results into high debts. The theoretical evidence provided in this paper justifies that the USA economy mostly thrives in times of recession and great depression. Keynes theory suggests that spenders (government) should increase aggregate market demand through spending heavily.

This will go along way into creating more job opportunity and at the same time generating additional profits that can be reinvested to grow the economy (Davidson, 2010). The idea is that the US citizen must learn to allow the government to implement fiscal policies capable of increasing the total market demand for the economy to realize full employment.Both recession and depression can only threaten to attach the economy if the aggregate market demand for locally produced goods is low. However, the government fiscal policy to avert this kind of scenario is to encourage local entrepreneurship through deficit spending.

Consequently more and more jobs will be created and the economy will finally attain full employment. Contrary, in excess of market demand for locally products should prompt the government to exercise stringent fiscal policies (cut down spending and increasing tax) in order to regulate the aggregate demand and peg it at a point favorable to the economic prosperity of the USA. Having achieved a successful economic stability, the USA will only be striving to equally develop the entire world economy (Davidson, 2010).

ReferencesDavidson, P. (2010). Making dollars and sense of the U.S. government debt. Journal Of Post Keynesian Economics, 34(4 663). doi:10.2753/PKE0160-3477320410