Government spending and tax policy during economic recession

Economics - Macroeconomics

Economics

Various economists, both theoreticians and practitioners, have developed and applied concepts and principles designed in order to explain the economic laws that govern the society at some point, and to drive economic growth. Some of these principles include the opportunity cost concept, capitalism and socialism, and the invisible hand principle. The following pages will focus on addressing each of these principles, by explaining them and relating them to the economic situation that currently characterizes the U.S. society.

Opportunity Cost

The opportunity cost concept was developed by John Stuart Mill in order to decrease the level of difficulty in the decision making process. The concept is usually applied in situations where scarce resources must be used as efficiently as possible. Basically, when dealing with multiple alternatives, the opportunity cost represents the variants left out when selecting one of these alternatives. The concept can be applied in a variety of situations, including consumer choice, production possibilities, cost of capital, time management, career choice, analysis of comparative advantage.

On individual level, opportunity cost can be observed when a buyer only has a limited amount of money to spend and he has to choose between a clothing item or a meal, for example. If the buyer chooses to buy the clothing item, then the opportunity cost is represented by the meal. When applied in the production process, it represented the product than cannot be included in the production process because other products have been selected.

The opportunity cost concept was brought into discussion on macroeconomic level when President Barack Obama advertised his stimulus plan, arguing that it the stimulus program passed unemployment rate would reach 8%, and if it didn't pass it would reach 9%. But the reality is the actual unemployment rate is almost reaching 10% (Eddlem, 2009). In many theoreticians' and practitioners' opinion this approach was not a correct one.

It is difficult to decide which projects or which areas should be stimulated more in the detriment of others. And the decision must be rapidly taken and the priorities must be quickly established in order to allocate the required resources. In France, the stimulus plan mainly addresses the cultural aspect of the country, and also includes fixing potholes, upgrading railroads, and others (Schwartz, 2009).

Capitalism vs. Socialism

There are many essential differences between the capitalist and the socialist system. However, it is difficult to decide whether one of them is better than the other. The socialist system, usually associated with communism, assumes that economic means of production are directed by the masses. In this system, lower social cases are considered to be the most important, because they perform the actual work that drives social progress, which also means that they are entitled to a bigger share of the wealth. Socialism does not recognize private property rights. In socialist society, everyone is considered to be equal. Such an attitude has both advantages and disadvantages.

Capitalism mainly focuses on stimulating entrepreneurs in driving economic growth. The capitalist system focuses on individuals' self-interest. Although this system encourages personal actions, it considers that by achieving individual success, members of the society will help others reach a successful status.

Some blame the economic and financial crisis on the capitalist system characterizing the U.S., system that is considered to encourage greed and consumption (Dorrien, 2009). More and more people orient towards the idea that a form of socialism might be better suitable with the U.S. The societal system practiced in France serves as a model towards which the U.S. aspire.

President Barack Obama's healthcare reform plan is considered by many as being a socialist experiment that will significantly hurt the economy (CBS, 2009). In opposition, the President has stated that he does not intend to implement a healthcare system that depends on the government. Instead, he would prefer a system in which the government competes with private insurance companies for selling coverage.

The Invisible Hand Principle

The invisible hand principle was developed as an opposition to the protectionist system. This principle is actually a metaphor describing the self-regulating characteristic of the market. In other words, such a system can be implemented due to a combination of factors, like self-interest, competition, supply and demand. Adam Smith, who developed this theory, considered that the action of these forces and their effects are able to allocate resources within the society.

However, this concept was strongly criticized in relation with the economic and financial crisis that is currently affecting the U.S. And the rest of the world. Nobel Prize winner Joseph Stiglitz considers the invisible hand theory as being a myth. As mentioned above, the invisible hand theory states that the personal interest of economic agents activating in the market is capable of determining the way resources are allocated within the society in case. But it seems that the personal interest of bankers in the U.S. led to a wrongful allocation of resources, and to the economic crisis.

Furthermore, the state had to intervene in such a situation, proving that the invisible hand theory is not suitable for today's society. This is why the government had to take over Fannie Mae and Freddie Mac (Obama, 2009).

Conclusions