Fiscal Police (Part 12: Macroeconomic Policy)

(I’ve attached the chapter 32 summary from the ebook. I also included the video link at the end of my notes. If you need more, please let me know)

Upon viewing the link below that pertains to
– the Park Avenue: Money, Power and the American Dream | WHY POVERTY? documentary, Park Avenue: Money, Power and the American Dream⎜WHY POVERTY?⎜(Documentary) – YouTube and reading

– the Ch.32 material in the Foundations of Economics textbook,
please compose a short essay by answering the following questions in a meaningful manner:

Q1: Given that advanced economies and many regions throughout the world experienced a significant increase in income inequality since approximately the 1990s, and the worldwide economic and financial crisis largely contributed to the rise in income distribution inequality, how should the global governments utilize their most powerful tool – fiscal policy – to adequately address this type of inequality?

Q2: Considering the current state of the U.S. economy and all the knowledge that you have acquired during the semester so far, what type of fiscal policy would you recommend the federal government to pursue in order to bring the economy from a recessionary gap. That is, if your concern lies in (a) the provision of public services, then would you advise the policy package to include increased spending? If yes, then on what programs and how could the government fund this expenditure? (b) the size of the budget deficit, then how would you advise lowering it? (c) the tax wedge, then would your preferred policy package include tax cuts? If yes, then what public services would you advise the government to cut to achieve lower taxes?

Include examples from the film and readings to support your paper of 600 words minimum and to receive full credit for the assignment.

Please follow the guidelines below for submitting your paper:

1. Write the short essay in MLA format.

2. Use only the sources provided in the prompt.

ANSWER

Fiscal Policy (Part 12: Macroeconomic Policy)

Income inequality has increased in both developing and developed economies in recent decades. Fiscal policy is a principal tool that the local governments can rely on to influence income distribution. Ideally, fiscal policy entails using government tax revenues and expenditures to control the economy by adjusting aggregate demand or level of economic activity (Gillespie). The two fiscal policy tools that the government can rely on to reduce income inequality are spending and taxes. Taxes impact the economy by examining how much money the government will spend in various areas and how much money specific individuals will spend. On the other hand, spending entails driving money into various sectors in the government to facilitate income distribution.

There are several fiscal policy actions that the government may use to stimulate aggregate demand (Gillespie). Fiscal policy can reduce income inequality through progressive tax rate structures which redistribute income. Progressive Tax Rate Structures are those where marginal tax rates increase as taxable income increases among individuals or families, corporations, or other types of businesses. These have a greater impact on reducing income inequality because they take more money from high-income groups than from low-income groups. Progressive income taxation may lead to equitable income distribution, less economic and financial volatility, and higher revenues.

Fiscal policy can address income inequality by spending on transfers (cash, subsidies, grants) to lower-income groups through direct cash payments and tax credits (Gillespie). These transfers reduce income inequality because they provide resources, like food stamps or health care subsidies, directly to the recipients. Ideally, these payments and benefits would reach those who need them most. The fiscal policy reduces income inequality by investing in public goods and services that benefit all, like education or transportation infrastructure (Gillespie). By investing in these types of projects, which are often paid for through progressive tax rates, the fiscal policy reduces income inequality because the benefits of these projects disproportionately affect low-income groups. These investments also serve to increase productivity and economic growth over time, increasing GDP per capita.

Fiscal policy can reduce income inequality by promoting competition among private enterprises. Through infrastructure projects and government regulation, fiscal policy can promote market competition among businesses or between public and private sectors to reduce income inequality. For example, constructing a new highway will allow for increased competition among transportation companies currently using old highways. Similarly, new rules on telecommunications firms can increase competition within the industry, lowering costs for consumers across the board. The promotion or support of foreign direct investment can also impact income inequality reduction since low-income individuals can benefit from jobs created for foreign companies.

Therefore, the local governments can rely on fiscal policies to reduce income inequality by increasing domestic investment, tax structures, transfer payments, and government spending on education, healthcare, transportation, and other infrastructure projects. The fiscal policy reduces income inequality by making a more just society dependent on less charity assistance from outside sources. The redistribution of wealth towards those with lower incomes helps give basic needs to those who lack them instead of relying on outside charitable donations. Fiscal policies that reduce income inequality lead to a more efficient allocation of resources and increase long-term economic growth.

Expansionary Policy – Provision of Public services

Expansionary policy is the most appropriate fiscal policy for a recession. The government should focus more on investing in public goods and services to lead the economy from a recession gap. Public spending is targeted towards lowering unemployment, rebuilding the country, gaining more equity, and actions against poverty. Public goods such as health care, infrastructure, investments, education, and research contribute positively to the nation’s GDP (Gillespie). For instance, the development of infrastructure will help boost economic growth and improve competitiveness.

Moreover, wealth is distributed among populations evenly, emphasizing the common good rather than personal gain. It also enables economic growth by enabling knowledge exchange, technology transfer, and increasing productivity. The government should focus on investing in public goods and services rather than tax cuts because it benefits the people more, increases GDP, encourages companies that provide these types of goods/services to expand their workforce, and doesn’t cause a big impact on inflation.

The government should increase its expenditure on healthcare, education, and infrastructure due to their influence on the nation’s productive potential. Ideally, the expenditure side offers the public goods and services that make the labor more productive, thus enhancing productivity (Gillespie). Government spending, such as expanding the national highway system, is extremely effective in stimulating the economy because it puts more money into circulation and improves public works. The government spending on programs such as private investments, education, health care, and infrastructure are common targets for expansionary policy since they increase the productivity of our citizens.

The government can spend on infrastructure through the expansion of national highways, railroads, and broadband. Private investments can include the building of new businesses or renovations for existing businesses. A new business brings in money, increases the number of jobs in an economy, and expands the size of the economy by increasing total output. Spending on healthcare and education can include the creation of new hospitals and educational facilities that will act as a multiplier for the economy.

Works Cited

Gillespie, Andrew. Foundations of economics. Oxford University Press, USA, 2014.