With the election of a new president of the United States only a few months away and faced with a badgering economy, it comes as no surprise that both Democrats and Republicans are busy at work in search of widespread solutions to the problems confronting the world’s most prosperous and powerful country.
Leading the way, thus far, are the two foremost contenders – President Barak Obama and former Governor Mitt Romney – both of whom recently unveiled contrasting plans to restore jobs and growth in the American economy.
Against that backdrop, I intend to address this simple question: which plan is better for the American economy? An answer to this question clearly cannot be attempted without some appreciation for the structure of the economy and the main drivers of economic growth and development.
Based on the most recent data from the World Bank’s World Development Indicators, services account for well over 75 per cent of economic activity in the United States. And that is consistent with the fact that mass consumption provides the main impetus to growth and development of the economy, a significant proportion of which results from employment in small businesses.
Based on this scenario, it is now logical to compare the two plans and make an intelligent inference as to which is better for the Unites States’ economy. In brief, President Obama’s plan is designed to encourage job creation through massive spending by the federal government and some tax relief for specific segments of the private sector.
On the other hand, former Governor Mitt Romney’s strategy is mostly supply-side in orientation, highlighted by proposed cuts in taxes to businesses and individuals, while reducing the size and role of the federal government.
The standard IS-LM framework, used in macroeconomics to analyze the effects of fiscal and monetary policies for closed or open economies, would indisputably show that increases in government spending and cuts in taxes are both examples of expansionary fiscal policies and are mutually growth-enhancing macroeconomic strategies.
But, the composition of final output differs according to which policy is adopted. Tax cuts are designed to stimulate consumer spending; so a lower proportion of national output will be accounted for by government expenditure.
With higher spending by the government, a smaller proportion of output can be attributed to consumers’ outlays. And that runs contrary to the known fact that mass consumption drives the American economy.
When the theoretical perspective in relation to the effects of tax cuts and increased government spending on the composition of final national output is combined with the facts that, at present, the American economy is handcuffed by US$14.7 trillion in national debt, a federal budget deficit of US$1.3 trillion and a trade deficit of US$709.7 billion; and taking into account the simple reality that the massive federal government spending undertaken by President Obama since assuming office has failed to turn around the fortunes of the United States’ economy, it is difficult to vote in favour of the president’s plan.
It is my opinion that Romney’s plan for jobs and growth is better than that of Obama’s for the American economy and, by extension, the world economy.
