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A Second Stimulus Package

Paper type: Essay
Pages: 11 (2656 words)
Categories: Business, Economy, Finance, Government
Downloads: 20
Views: 6

Introduction

The main purpose of the economic stimulus package was to prevent the re-emergence of the panic that gripped investors in 2008. It also aimed to restore trust in the finance industry by further limiting bonuses for senior executives for companies that received TARP funds (Recovery. gov). The $787 billion economic stimulus package was approved by Congress in February, 2009. The plan was to jumpstart economic growth, and save between 900,000 – 2. 3 million jobs.

The economic stimulus bill allocated funds as follows: $288 billion in tax cuts, $224 billion in extended unemployment benefits, education and health care, and $275 billion for job creation using federal contracts, grants and loans.

If America needed a second round of economic stimulus package like the American Recovery and Reinvestment Act of 2009, as an advisor to the president I would provide both positive and negative impacts, gains and losses , monetary and inflationary impacts, trade and trade deficits impacts, and tax considerations.

The economic stimulus package

Although the economic stimulus package was to be spent over ten years, the bulk was budgeted for the first three fiscal years: $185 billion in 2009, $400 billion in 2010 and $135 billion in 2011.

The Plan did better than that. By October 30, 2009, over $241. 9 billion had been spent: $92. 8 billion in tax relief, $86. 5 billion in unemployment and other benefits and $62. 6 billion in job creation grants. By October 8, 2010, the program had spent $554. 4 billion :$243. 4 billion in tax relief, $163. 2 billion in entitlements and $147. billion in contracts, grants or loans. (Recovery. gov) . The CBO projected these funds would increase GDP growth by 1. 4% – 3. 8% by the end of 2009. This did not mean GDP growth was positive. The economy could remain in recession, defined as negative GDP growth. In fact, the CBO forecast the economy would be down 3% for 2009. (Recovery. gov) I would advise the president based off positive and negative impacts. One positive impact is based off of simple Keynesian models; the rationale for increased government spending during a recession is straightforward.

If governments employ underutilized labor and capital when they spend more, that provides an immediate boost to employment and output. A further stimulus comes from the spending by the owners of the unemployed labor and capital who benefit from the government spending. Their spending helps multiply the effects of the government spending still further, and so does spending by the recipients of this second round of spending. The total impact is the sum of all these separate boosts, and its ratio to the initial level of government spending is called the spending multiplier.

A study by Dr. Christina Romer, Chair of the Council of Economic Advisers, published shortly before she took office claimed the spending multiplier during the recession at that time would be well over 1. 0. Another positive effect of a second stimulus packet is that it would put more money in the economy to circulate and more people would be willing to buy more goods. Companies will have more money and they would be willing to spend more and hire more people.

The unemployment rate would start to diminish and the employment rate and employment force will start to increase. Job growth would come from projects to rebuild roads and bridges, plus make schools, homes and government buildings more energy-efficient, among other initiatives. Of course, construction projects aren’t all alike and workers from, say, the residential industry may need to retrain. There are also negative effects to a second stimulus. Some experts say that it is impossible to target effective spending programs that primarily utilize unemployed workers, or underemployed capital.

Spending on infrastructure, and especially on health, energy, and education, will mainly attract employed persons from other activities to the activities stimulated by the government spending. The net job creation from these and related spending is likely to be rather small. In addition, if the private activities crowded out are more valuable than the activities hastily stimulated by this plan, the value of the increase in employment and GDP could be very small, even negative. ” One economist is quoted saying Tax increases appear to have a very large, sustained and highly significant negative impact on output.

Since most of our exogenous tax changes are in fact reductions, the more intuitive way to express this result is that tax cuts have very large and persistent positive output effects. Former Bush economic adviser Lawrence Lindsey said, “The macroeconomic benefits of tax cuts can be two to three times larger than common estimates of the benefits related to spending increases. The relative advantage of tax cuts over spending is even clearer when the recession is centered on the household balance sheet. Another negative impact though that In the current context of the U. S. economy, it seems best to let fiscal policy have its main countercyclical impact through the automatic stabilizer. It would seem hard to improve on this performance with a more active discretionary fiscal policy, and an activist discretionary fiscal policy might even make the job of monetary authorities more difficult. It would be appropriate in the present American context, for discretionary fiscal policy to be saved explicitly for longer-term issues, requiring less frequent changes.

A longer-term focus

Examples of such a longer-term focus include fiscal policy proposals to balance the non-Social Security budget over the next ten years, to reduce marginal tax rates for long run economic efficiency, or even to reform the tax system and Social Security. ” These are only some of the negative effects (www. money. usnews. com). If this Policy is enacted there will defiantly be some winners and losers in the economy. If this policy is passed the Democrats would be considered gainers, since they are the ones who supported and pushed for the first Stimulus Packet. Based on their beliefs the education sector would be gainers.

States would be using its educational technology stimulus funds to enhance awareness of open education resources. The state hopes to create or develop content-specific communities to support student achievement and create more effective teachers by identifying open educational resources, training teachers, and supporting the development of additional open educational resources. Like the old ARRA will use its “The Enhancing Education Through Technology “(EETT) stimulus funds to create the Technology Rich Classroom (TRC), which is built upon a model created over the past seven years.

The program provides evidence that when integrated into a 21st-century classroom model and supported by ongoing teacher professional development, educational technology can improve student learning. Kansas required its local school systems to develop teams that would build the capacity to integrate educational technology into classrooms using research-based instructional methods. Home builders, new-car buyers and manufacturers would be among some of the major winners. Home builders would see a major boost, extends a home-buyer credit to $15,000, or 10% of the purchase price, whichever is less, and applies to all home buyers. Car buyers and manufacturers will benefit from the packet because it’ll boost the demand for cars. Another big gainer from the stimulus a package was constructions workers. It’s said construction workers lost close to one million jobs over the past few years. With a continuation of the stimulus more money could be given to states work reconstruct roads, bridges, and schools. Some losers of the second economic stimulus would be the Republicans, State government and generously paid corporate executives.

Once again, just like the first stimulus the republicans will fight vigorously against the package try to stop it from happening and if passed they will gain anything. State government is considered big losers again because they somewhat loses power with all the federal programs that all states must provide for their residents. Another loser would be corporate executives. If a second package is enacted restriction and regulations could be increased. Top executives that used to award themselves with compensation packages would be monitored and have to follow new rules.

Like the first stimulus plan, companies that want to pay their executives more than $500,000 will have to do so through stocks that cannot be sold until the companies pay back the money they borrow from the government. The rules will be implemented by the Treasury Department and do not need to be approved by Congress. The restrictions will most affect large companies that receive “exceptional assistance,” such as Citigroup. The struggling banking giant has taken about $45 billion from the government’s Troubled Asset Relief Program (Cnn. com). I would also advise the president on monetary and inflationary impacts.

A second American Recovery and Reinvestment

A second American Recovery and Reinvestment could have a negative effect on inflation. Inflation is the product of the demand for money as well as of the supply. And if the Fed finances federal deficits in a moribund economy, it can create more money than the economy can use. The result is “stagflation,” a term coined to describe the 1970s experience. As the global economy slows and Congress relies more on the Fed to finance a huge deficit, there is a very real danger of a return of stagflation. With the Fed pouring excess money into the economy, the dollar amount could have a lesser value people and all prices rise.

Some experts say more government spending will not lead the Federal Reserve to raise interest rates to fight inflation; the Federal Reserve might have to push interest rates to the floor right but it goal would be to push them lower, perhaps another 5 percent into negative terrain. Given that, the multiplier on government spending is not 0. 4, but more like 1. 5. In other words, we do not get $40 billion of additional production and employment for $100 billion in government spending: We get $150 billion. another negative effect of inflation is a decrease of real value of monetary items over time.

With the amount of money being spent another second stimulus would have major effects of trade and trade deficits. Trade could decrease, since America is in the red in trade deficit and has a weak economy that needs excessive money other countries least likely to trade with struggling country. With a second stimulus, it would increase the trade deficit. Economic theory dictates that a trade deficit is not necessarily a bad situation because it often corrects itself over time. However, a deficit has been reported and growing in the United States for the past few decades, which has some economists worried.

This means that large amounts of the U. S. dollar are being held by foreign nations, which may decide to sell at any time. A large increase in dollar sales can drive the value of the currency down, making it more costly to purchase imports. A large increase in dollar sales can drive the value of the currency down, making it more costly to purchase imports. It could also cause problems with Americans losing their jobs to outsourcing and green jobs. In the first stimulus a majority of the funding package went to foreign firms.

Meanwhile, to pay for the stimulus package, the government borrowed a huge amount of money from the American people, money that would otherwise have been spent on American products, or been invested in America’s companies. The current trade deficit is approximately $453, 693, and 238,057.  If a second American Recovery and Reinvestment Act were to be passed, one driving force would be tax considerations. Some say the government needs to pass the second to stimulus to keep Bush’s tax cuts still going, which expires at the end of the year.

The apparent deal over the Bush tax cuts highlights why the Democrats probably had to accept the extension of all the Bush tax cuts. One expert came with the scenario that President Obama and Congressional Democrats refuse to extend the tax cuts on income above $250,000. Congressional Republicans refuse to extend any tax cuts unless all cuts are extended. So all of the Bush tax cuts would expire on December 31st . Congress and the White House spend weeks or months fighting over the issue, accomplishing little else and potentially damaging consumer confidence and business confidence.

Eventually, the two parties come to some kind of compromise. It restores most, but not all, of the tax cuts. The cost to the budget — that is, the amount of money pumped into an ailing economy — is about $400 billion over two years. Another economist thinks what actually seems to be happening is the democrats and republicans agree to extend all the tax cuts and also agree to an extension of unemployment benefits, a cut in the payroll tax and, “continuation of a college-tuition tax credit for some families, an expansion of the earned income tax credit and a provision to allow businesses to write off the cost of certain equipment purchases. The amount of money pumped into the ailing economy: about $900 billion over years. Subtract the $400 billion cost of the Bush tax cuts. Subtract another $140 billion or so, which is the cost of extending the Alternative Minimum Tax patch (and almost certainly would have happened regardless). You’re then left with more than $300 billion in net stimulus over two years. And while that sum will not be enough to fix the economy all by itself, it is serious money. The original stimulus bill cost about $800 billion, and most of the money will have been spent in the first two years after its passage.

This deal looks an awful lot like a second stimulus

But the outcome is not all bad, especially for the short-term sake of the economy (Nytimes. com). Finally if the stimulus was passed here are some of the ideas that I would support and advise the president on, Unemployment insurance, aid state and localities, and tax rebates. Unemployment insurance has traditionally been a backstop for the economy, serving as an important automatic stabilizer. With the job situation deteriorating there are many workers reaching the point where benefits are exhausted and it would make sense to extend the duration.

Over the years, the fraction of the unemployed receiving benefits has declined and women seem particularly disadvantaged because they often work part-time. In 1975 Special Unemployment Assistance was enacted by a Democratic Congress and signed by President Ford to help persons that were not eligible under the usual rules. I would support such a program again now, particularly to help single mothers or fathers who have lost jobs but are not eligible for standard UI benefits and who will find it difficult to qualify for welfare. This program should be funded by the federal government and not by the states  As for Aid for States and Localities, there are many states and localities that are feeling tremendous budget pressures because of the weak economy and the decline in property tax revenue. Providing assistance to them would prevent or the cutbacks in spending that would otherwise occur. General budget assistance, targeted perhaps to states with high unemployment and mortgage default rates and to Assistance to sustain Medicaid spending. Some states are finding it difficult or impossible to sustain support for health care because of budget pressures.

For tax rebates I would urge the committee to pass quickly a new tax rebate package. If this were done very quickly, the IRS could use the same taxpayer list that was used earlier this year and the money would be released this fall. Having the rebates be refundable ensures that low and moderate income families get a benefit. The IRS got the rebate checks out quickly earlier this year and using this approach is simple and quick  Based off the research I found I would not advise the President to pass another American Recovery and Reinvestment Act unless it was absolutely necessary.

References

  1. www.money.usnews.com
  2. www.Cnn.com
  3. www.Recovery.gov
  4. www.uchicagolaw.typepad.com
  5. www.useconomy.about.com
  6. www.americaneconomicalert.org
  7. www.nytimes.com
  8. www.openmarket.org
  9. www.online.wsj.com
  10. www.brookings.edu

Cite this essay

A Second Stimulus Package. (2020, Jun 02). Retrieved from https://studymoose.com/second-stimulus-package-new-essay

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