Economics in the Last Quarter, Term Paper

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Another fiscal policy that could be implemented is for the government to spend more, thereby increasing aggregate demand. This may have an impact on consumer confidence about the long-run state of the economy, but those long-run concerns are not driving consumer spending today. At this time, the spending policy is something that government can pursue. If poorly targeted, however, its impacts will be temporary. Indeed, if everybody knows that the measure is temporary, this will not affect consumer confidence or business investment in the long run. However, if the policy appears permanent, then the responses could be more permanent in nature as well.

Lowering taxes on that bottom 80% will increase consumer spending, but again might not improve consumer confidence because it only makes the long-run deficit problem worse. Only spending on job creation, therefore, is recommended because it serves to a) address some of the crippling issues relating to long-run structural unemployment and b) improves confidence in the short-term no matter what it might do to confidence in the long-term.

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Fiscal policy should also address the long-term confidence issue in a meaningful way, by reigning in health care spending and entitlements. Current proposals on the latter, which include grandfather clauses for baby boomers (the wealthiest generation ever so the least likely to actually need such entitlements) do nothing to address the problem, because such policies only push the spending cuts further down the road, at which time the next generation will be in power and probably choose to push those cuts further down the road. Meaningful action today on entitlements and health care spending, combined with job creation programs, will improve consumer confidence in the short run and long run, allowing aggregate demand to move to a permanently….....

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