Fiscal policy can exert an influence on the overall economic fortunes of a national economy primarily through the manipulation of spending programs and taxes. This forms the crux of the two warring overall perspectives on government and economy that are constantly being debated: how much governmental influence into the open marketplace should be allowed. To extrapolate this concept further is to eventually lead to the questions that are highly important today considering whether unregulated free market economics is the path to prosperity or is it rather government regulation that puts the brakes on greed.
The central point of Keynesian economics, named after John Maynard Keynes in case you don’t know, is that private spending cannot be relied upon to achieve full employment. In order to fill in the gaps in employment levels, government spending programs are required to be enacted. During the Great Depression when private spending could not even come close to ensuring anything near full employment, government spending programs became a necessity. Tax cuts can be useful for spurring economic growth during bull markets, but when recessions hit the economy needs to be jolted by tax cuts and increasing spending. This results in increased deficits, but the use of stabilizers like unemployment benefits are intended to offset the damage by increasing the ability for consumers to spend and spur economic growth.
In 2000 as Pres. Clinton was preparing to hand over the job of running the U.S. economy to Pres. Bush, there was a budget surplus. By the end of Pres. Bush’s first year in office that surplus had disappeared. The status of the federal budget from 2000 to the present has been one of steadily increasing deficits. In fact, the legacy of the Bush Presidency is one of staggering record deficits created by the combination of generous tax cuts to the wealthiest of Americans and extraordinary spending increases for the military and homeland security departments, along with the genuinely stunning amount that has been spent on the continuing wars in Iraq and Afghanistan.
Fiscal policy in American since 2001 has been one that is based on the concept of a lack of government intrusion into economics in the traditional Keynesian ways with, instead, an emphasis on relaxing regulations and adopting a laissez faire policy not just weak on government oversight, but defiantly antagonistic to holding businesses accountable for anything. Rather than manipulating economic policy through budgetary intervention, the budgets have been weighted heavily toward defense strategies and away from policies that trend toward economic development. Even in the wake of the devastation of Hurricane Katrina in which fiscal policy could actually have created jobs by rebuilding the infrastructure of the city, the Bush budgets have instead adopted a policy of cutting budgetary spending on development targeted toward the lower classes, as well as cuts in education, and social services.
The status of the federal budgets since 2001 has been one of increased spending in sectors devoted to security and defense, as well as paying for a war with no end in sight, that has had the effect of bloating the deficit to such an extent that the budgets for the next President will be one in which spending on those social programs will of necessity continue to be cut simply in order to contain the expanding deficits of hidden spending.