Six Problems With Fiscal Policy and Automatic Stabilizer

Subject: Economics
Pages: 2
Words: 350
Reading time:
2 min

Financing the deficit doesn’t have offsetting effects. Some economists believe that government financing of deficit spending offsets the deficit’s expansionary effect. They believe that government borrowing increases interest rates and crowds out private investment. Crowding out is the offsetting of a change in government expenditures by a change in private expenditures in the opposite direction.

Knowing what the situation is. Data problems limit the use of fiscal policy for fine-tuning. Getting reliable numbers on the economy takes time. We may be in the middle of a recession and not know it. The government has large econometric models and leading indicators to predict where the economy will be in the near future.

Knowing the level of potential income. No one knows for sure the level of potential income. Potential income has been called the full-employment level of income. Differences in estimates of potential income often lead to different policy recommendations. In most cases, the U.S. economy is in an ambiguous state. Some economists will call for expansionary policy, and others call for tightening policy.

The government’s flexibility in changing taxes and spending. Putting fiscal policy into place takes time and has serious implementation problems. Numerous political and institutional realities in the U.S today make it a difficult task to implement fiscal policy. Size of the government debt doesn’t matter. There is no inherent reason why the adoption of activists’ policies should have caused high government deficits year after year.

Fiscal policy doesn’t negatively affect other governmental goals. In reality, it often does: An economy has many goals – achieving potential income is only one of those goals. National economic goals often conflict.Automatic stabilizers do not successfully handle extreme changes in the economy. The main function of automatic stabilizers lies in the range of minor shifts that could negatively impact one section or another of the economic classes represented among the populace. In the event of a major shift in the economy, governments employ fiscal policy as a tool to tackle the situation.