Sources used in this document:

"Fiscal policy refers to the government's choices regarding the overall level of government purchases or taxes" (Mankiw, G.N. 2004). Reviewing the 2011 Obama Budget of 3.69 trillion (The New York Times. February 1, 2010), an immediate consideration regarding the outlays is that mandatory spending: Social Security, Medicare, Interest on Debt; 64% of the total proposed budget, is effectively off limits to changes. The remaining discretionary spending of 1.415 trillion is available as a fiscal tool (The Washington Post.com. 2010). Certainly, the President could propose additional spending measures such as his American Jobs Act released in September 2011.

Concomitant to discretionary spending is the revenue collected by the Federal Government in taxes, 2.57 trillion in the 2011 Obama budget (The Washington Post.com. 2010). One of the prominent fiscal tools the President has utilized is deficit spending, 1.27 trillion in the proposed budget to stimulate the economy (The Washington Post.com. 2010). Government spending reflects a belief in the multiplier demonstrated by "additional shifts in aggregate demand when expansionary fiscal policy increases income and thereby increases consumer spending" (Mankiw, G.N. 2004). There is debate over the size of the multiplier; Keynesians contend it is greater than one, while supply- side economists believe the coefficient is significantly less than one. While this debate is important, the reality is that Congress and the President will not agree on further government spending to stimulate the economy, given the deficit and the explosion of debt past 15 trillion dollars.

The other fiscal policy tool available for use is tax cuts, which allow individuals and businesses to keep more of the money they earn, a portion of which will be saved, and a part which will be spent. The consumption side will lead to increased aggregate demand allowing the economy to grow. In the longer-term though the reduction in marginal tax rates will engender an environment leading to greater incentives to work, save, and invest. Tax cuts though must strive to be revenue neutral from an accounting perspective, with the understanding that there will be a strong economic effect. The