Ever since his election in 2008,
President Obama has been faced with a weakening economy. As a result, he enacted the American Recovery
and Reinvestment Act in 2009 as a fiscal policy, hoping that a large amount of government
spending would increase consumption and aggregate demand compared to what it
would have been without the policy. But
the effects of the stimulus package were much less than expected, leading to
skepticism towards the new American Jobs Act that Obama is proposing.
The
Dynamic Aggregate Demand and Supply Model predicts that expansionary fiscal
policy should shift the aggregate demand curve right, with an increase in real
GDP to its potential level and a higher price level. Theoretically, consumption spending should
have increased: The initial increase in government purchases causes the
aggregate demand curve to shift to the right because total spending in the
economy is now higher at every price level.
The effect of increased government spending can also be shown by the
equation
Y=
C+I+G+NX. If “G” (government) increases,
then “Y” (GDP) will also increase.
In
this example of the Dynamic Model, the economy is in a recession at point A,
with Real GDP and Price Level below the potential along the LRAS curve. An expansionary fiscal policy will cause
aggregate demand to shift to the right, from AD 1 to AD 2, increasing Real GDP
and Price Level so that the economy is in equilibrium at point B on the LRAS
curve.
Despite
what the Dynamic Model shows, some economists were skeptical of the stimulus
package’s effects: The skeptics argued
that because the stimulus package was developed in a very short period of time,
some of the projects being funded were not well designed, and the spending on
them would be wasted. For example, some
of the stimulus went to transportation and housing, which included spending on
construction projects like highway repair and expansion. Unfortunately, those jobs were
temporary. Those who were hired for
construction were once again out of a job once the projects were completed.
The overestimated effects of the
2009 stimulus package have caused major skepticism towards Obama’s latest plan,
the American Jobs Act. Critics say this
is simply a second version of the 2009 stimulus and will do nothing for the
economy, pointing out that the last stimulus promised that unemployment would
fall below 8.2%. According to the Google
Public Data Explorer, unemployment is now at 9.1%, which is above the promised
rate after the 2009 stimulus.
Additional reasons for the possible
failure of the American Jobs Act can be explained by Ricardian Equivalence, an
economic theory suggesting that when the government attempts to stimulate
demand through debt-financed government spending, demand stays the same. This could be caused by consumers anticipating a future tax increase in order to pay off public debt, causing them
to save their excess money. Another
possible outcome is that the economy will take a longer time than expected to
recover, if consumer confidence does not change. Right now, people believe that the economy is
still deep in a recession and they do not feel that spending is safe.
