Essay about Will Us Fiscal Expansion Be Effective?

1884 Words Dec 5th, 2016 8 Pages
Will US Fiscal Expansion Be Effective?
The issue of the effectiveness of government intervention in an economy has been hotly debated since Adam Smith wrote the Wealth of Nations in 1776. Classical economists have always believed that unfettered market forces produce the best outcomes for society, including full employment. Any attempts to prevent the owners of capital from pursuing self-interest via government intervention would prevent an economic outcome where all segments in society fully benefitted. Under classical economics, therefore, the implications stemming from state intervention in economic matters are invariably adverse. The growth rate of the economy is ultimately determined by decisions made by the private sector. Any attempts by the government aimed at stimulating the economy will invariably fail, particularly if government debt issuance is boosted to fund higher public spending. This outcome is known as the Ricardian Equivalence, as postulated by David Ricardo, where the private sector saves more because it expects future tax increases to be imposed in order to pay off higher government debt. Thus, the net impact of fiscal stimulus on the economy was viewed as negligible. The Ricardian Equivalence produces a similar outcome to so-called crowding out, where greater government borrowing produces higher interest rates which stymie private sector investment. Currently, financial markets are anticipating a fiscal stimulus under the incoming Trump Administration,…

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