October 13, 2010

5 Ways to Make a Bad Economy Better

To sum up this article, foxnews went and compiled the top recommendations from economists in Washington DC on how they would make the economy better. Here are the recommendations:
1) cut the corporate tax rate
2) renew unemployment benefits
3) extend the Bush tax cuts
4) more stimulus money
5) cut spending

Cutting the corporate tax rate would allow big business to increase profit which would allow them to either reinvest that money or their workers would be better off. More profitable big businesses can only be a good thing for an economy, so I believe that this solution has some validity. The more profit a company has the more of their product they are willing to supply and the quality of the good is likely to increase. An increase in supply of a good would lead to lower prices for the consumer. Lower prices for consumers, higher wages for big business workers which would then be put back into the economy (hopefully), and higher productivity in big business would all be things that could help put this economy on track.

Renewing jobless benefits is only a short term fix to a long term problem. People who are poor need help getting on their feet, but by renewing jobless benefits every time it comes to Congress does not give the jobless a reason to want to get a job. The people that receive the job benefits do end up spending that money which puts money into the economy but in the long term them staying unemployed and receiving a government check is not the answer. Decreasing the amount of jobless benefits over time would be a way to not completely take away support to the poor but at the same time giving them incentive to find a job because the time will come when the check won't show up.

Extending the Bush tax cuts is a hot topic right now, and one that President Obama is seemingly going back and forth about. In the demand function Qd= f(Price, Price of substitutes, price of compliments, Consumer Income, Number of Consumers), we can see that Income would be part of the function effected by a tax cut. Continuing the tax cuts would keep current demand the same all other things constant, but hiking taxes, even if only those making $250,000 or up are taxed, market demand will decrease for a number of goods. The reduced purchasing power of the wealthy limits the productivity of business by not allowing wealthy people to put money into the market and contributing to business revenue. Extending the Bush tax cuts is a valid way to help the economy recover.

An interesting solution to our recession brought up by these Washington DC economists was to "pump in more stimulus." As we have discussed, giving people or companies more income can increase their budget line and increase their possible maximum utility, but this stimulus gives us a false sense of security. By printing and giving out money the government consumers or businesses are given a spike in their purchasing power. If income spikes then, as our demand function shows us in the above paragraph, that demand will increase. An increase in demand will lead to higher prices. The end result of this fiscal policy of stimulus and bailouts will lead to rapid inflation, so this is probably not a very good solution to solve our economic problems.

The last idea that the economists in Washington DC brought up was to cut spending. Wait, do WHAT? Hold on, is it even possible for government to cut spending? Let me answer that question, YES! I couldn't believe that this was the last of the five that the economists suggested because this to me seems to be one of the easiest solutions. The federal government is broke and the first step to fixing something that is broken is to cut it, well not really, but cutting back on spending is a great first step in establishing some fiscal discretion. As we have seen, government putting money in the market has lead to outcomes other than the efficient allocation of resources, so cutting back on gov't spending would help curb this.

Overall, I think that three of these "fixes" would really benefit the country. Although they may seem prototypical conservative viewpoints, from what we have learned in class, cutting the corporate tax rate, extending the Bush tax cuts, and cutting spending would help this country's economy in the long term.

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