Fiscal policy and the US economy - Essay Example

'Auerbach and Feenberg (2000) have estimated that automatic tax stabilizers offset about 8% of the impact of an economic shock to GDP.'(Economic Research and Data. The Role of Fiscal Policy. 2002) Mere anticipation of projected fiscal action can have an impact on the U.S. economy. Households and business enterprises will operate their individual spending habits based on both present economics as well as future economics. For instance, a tax cut will leave households will more disposable income, however, if the tax cut is looked upon as a temporary measure it will not contribute to increased consumer expenditure.

Similarly, investment tax credits which will only lower the cost of investment ventures on a temporary basis will likely encourage investors to time their spending so as to capitalize on the tax credit initiatives. It is therefore imperative that fiscal policy be considered and conducted in such a manner as to take into consideration the likely impact of both the current and future implications. 'When expectations of future fiscal policy are important, "expansionary" fiscal policy-an increase in government spending, for example-may actually be contractionary'.

(Economic Research and Data. The Role of Fiscal Policy. . It can also influence financial markets to anticipate future tax hikes. The implications are detrimental to the general economy. As a result, long-term interest rates will go up, investors will hold back somewhat on investments thereby circumventing the government's intended expansionary effects of its spending. During the country's recession of the 1990-1991 fiscal year the President Bill Clinton's Council of Economic Advisers (CEA) made a similar observation:'an attempted stimulus that abandoned, or was perceived to abandon, serious discipline on the growth of future spending or on the reduction in the multiyear structural deficit probably would produce a substantial rise in interest rates.

That would offset a large portion of the direct stimulus in the short run and would leave the economy thereafter with a higher cost of capital, which would be detrimental to investment necessary for long-run growth.'(US President. 1992. p.25)According to Alesina, Perotti and Tavares a reduction in deficits are more likely to be expansionary when they entail government spending cuts and government salaries as well as transfers. These cuts have the effect of indicating decreases in government spending activity on a permanent basis and as a result there is a general public perception that taxes will be decreased in the future.

On the other hand, decreases in the deficit which are accomplished via tax increases appear to be 'contractionary'.(Alesina. 1998. pp-197-248. The US government's role in the nation's economy cannot be accomplished by merely regulating its fiscal spending and management. The government can only achieve the best results possible for the good of the US