Macroeconomic Analysis of the US Economy: Stimulus Package

In macroeconomics we focus on the United States economy as a whole rather than the smaller pieces that make it up. We also analyze the overall cause and effect of certain situations in order to further understand how these items affect the economy on a short-term and long-term basis. It is important to understand these things as a member of such a large society as it helps create a better idea of our specific roles at this time. When trying to select a topic that would best directly reflect the economy as whole and the impact that any decision could have on the overall well being of its people, what better topic of discussion than the 2009 economic stimulus plan.

The 2009 economic stimulus plan being implemented under the Obama administration is titled the American Recovery and Reinvestment Act of 2009 abbreviated as ARRA. This package was signed by President Obama on February 17, 2009. The current focus of the stimulus plan is economic expansion. The plan focuses on the current state of the economy while trying not to damage future funds and spending. A few key things of importance in the stimulus plan are health care, creation of new jobs, and new resources for energy. This 787 billion dollar plan strives to pull the economy out of its current recession in hopes of healing the global community.

The American Recovery and Reinvestment Act of 2009 is the biggest stimulus plan put into place since the Roosevelt Administration. The importance of this plan is its overall impact in the United States. If the plan follows through in accordance with the incentives proposed, the economy should feel a breakthrough from the recession. On the contrary, if implemented too quickly, it may cause a reverse effect and draw the economy into a greater recession. It is important to discuss the stimulus plan as it directly affects the citizens of this country. We wanted a topic that would educate us as well as provide information supportive of macroeconomics and the broader topic. The American Recovery and Reinvestment Act of 2009 is an important topic of discussion as it evaluates and analyzes the current economic crisis and the things the government needs and wants to do in order to satisfy the needs of its current members.

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In the economic stimulus plan of 2008 and the extended version American Recovery and Reinvestment Act of 2009 & 2010, are solutions to reinvest in the economy from different tax use aspects. The Government uses fiscal policy tools as a solution to the economic recession, just as in the Great depression. This time around tax cuts returned in the form of stimulus checks are being used to increase consumption and investment in U.S. goods. Due to the fact that our economy is at an exceptionally large deficit, a plan that would help decrease taxes in the current 2010 year would be ideal. Structural explanations for the solutions that the Government applies are Keynesian Economics. One of the theories associated with Keynesian economics is the expansionary fiscal policy which explains what happens when government spending increases. The following formula further explains this theory; (G á ðADá [C+I +Gá+NX] (TâðADá [Cá+ Iá+G+NX]) taxes reduced increase aggregate demand. The 2008 stimulus plan was much less complex than the ARRA. Comparing total cost and distributions, the 2008 bill only cost 150 billion dollars. The 2008 stimulus plan didn’t have a huge effect on the economy as it only increased consumption by 3% due to a prolonged process in the distribution of stimulus checks. The American Recovery and Reinvestment act of 2009 specifies that 37% of the package is to be devoted to tax cuts that are equivalent to approximately 288 billion dollars. 18% of the package or 144 billion dollars is being given for state and local fiscal relief. 45% of the package or 357 billion dollars is being given to social and spending programs on a federal level.

In comparison to the 2008 stimulus plan, this plan serves a much broader sector of the economy as billions of tax dollars are being presented to local state fiscal relief, health care, education, infrastructure, developments in science and a few of other areas. The American Recovery and Reinvestment act of 2009 is still in progress until 2010, so the effects are still unpredictable as to how the economy will be affected until the process is complete. It’s probably safe to say that tax reduction is the most important portion in the stimulus plans process as it will increase the overall aggregate demand and spending amongst the U.S. citizens.

In addition, considering the fact that our country has plummeted into recession, this package is said to help the economy recover from its detrimental state. According to hubpages.com the main focus of the ARRA is to increase consumer consumption, investment and spending in the market. This package also co-exists with Fiscal policies, Budget deficits and Debt. The president is considering using two fiscal tools to help improve the economy which include government spending, and taxes illustrated in chapter 8 of the Macroeconomics brief edition book. The government accumulated an 819 billion dollar budget in order to spend on the entire stimulus package. This is a prime example of Discretionary fiscal policy. This policy explains the significant changes in government spending and collection of taxes, which also explains the current billon dollar budget being proposed by the government. These processes are a few ways to help our economy move toward expansion. With government spending increasing this causes a reduction in taxes. When taxes are decreased, it leaves consumers more money to spend on goods and services, causing an increase in the overall aggregate demand. In increase in the overall demand of goods and services helps regenerate the economy in an effort to push it out of the recession. In addition, an overall increase in consumer spending will allow the government to pull government spending from certain areas as consumers become more optimistic about the economy. Something the American Recovery and Reinvestment Act of 2009 definitely wants to avoid is the Crowding Out Effect. When there is fiscal expansion through an increase in interest rate, aggregate demand is forced to decrease. An example of the crowding out effect is the current lack of investment, such as fewer people are purchasing homes.

The American Recovery and Reinvestment Act of 2009 is looking towards an expansionary policy. The proof is clearly defined in the different measures associated with the bill. Being that the government is spending money at all in an effort to help the economy is an obvious sign of expansionary fiscal policy. The ARRA is pushing for an increase in government spending and decrease in taxes. These are two aspects that describe expansionary policy as explained in chapter 8.

The current United States government debt is set at 11.4 trillion dollars and steadily rising. Looking at the fact that the Obama Administration plans to spend an additional 787 billion dollars of what the government already doesn’t have, it is believed that this is not the best of ides. There are many concerns associated with the stimulus package and its long-term effects on the U.S. economy. The two main concerns being listed as the stimulus package not working, and even if it does work that the plan could still be problematic. More than anything the concern is that if the U.S deficit expands too quickly it will require the government to borrow internationally. According to the Council on Foreign Relations, “if the government starts borrowing internationally, it will in turn weaken the U.S. geopolitical strength and increase the risk of the U.S. defaulting in on its international debt and facing a true financial meltdown.” Adversely the stimulus plan has the potential to bring the community back to a normal state. Jason Furman, the senior economic advisor during Obama’s campaign, argues that the stimulus plan need be:

Timely so that it guarantees that spending affects the economy when it is needed the most, and in order to prevent overexpansion or rapid inflation

Targeted to ensure that ach dollar being spent is used to its maximum potential in the gross domestic product and helps the people most effected by the current state of the economy and,

Temporary in order to prevent unnecessary strain on the country’s budget in the long-run

Overall, many economist feel as though the stimulus package is headed in the right direction as it focuses on the many things affecting the people most effected by the country’s recession. Tyler Cowen, an economic blogger, recently wrote that Obama’s plan appears to take into account the frightening possibility of the U.S. defaulting on its international debt, in turn explaining why the stimulus package isn’t any larger.

In conclusion, we have to come to understand not only the overall purpose of the stimulus package but also the effects that it may have on the economy in the long-run. It has been brought to our attention that although the efforts of the stimulus package are to push the economy towards expansion, it is going to require the members of this country to be more optimistic about the economy. The measures established in the American Recovery and Reinvestment Act of 2009 provide information regarding the expected direction the U.S. government is pushing for the economy to go. The Obama Administration plans to put 75 billion dollars into the economy by implementing tax cuts and pushing direct spending directly to the people who need it the most.