Economics Critical Analysis, Essay Example

Economists have difficulty in reaching agreement on the sizes of these multipliers because the multipliers on government spending also depend upon the time it may take to approve and plan infrastructures as well as hire the workers. The time delays are difficult to predict due to the uncertain nature of the politics we often witness in the Congress. The multipliers and the time elements in this case have a negative relationship and sometimes the multiplier effects only appear long after the economy has started recovery process in which case the effects are not valued as much as they would be earlier. Similarly, the multiplier effect of tax cuts also depends to a significant impact on the behavior of the citizens. The multiplier will be large if the citizens use most or all of the tax savings and smaller if much of it is either saved or used to repay debt in which case it is not resulting in any productive activity.

Crowding out refers to an increase in public sector spending that replaces or drives down private sector spending due to reasons that make it more expensive for private sector to borrow. One reason why it becomes expensive for private sector to borrow is due to rising interest rates as a result of government borrowing. The administration was relatively unconcerned about it as it implemented the stimulus package because the Fed has been keeping the interest rate at historically low levels and didn’t give any indication to raise it any time soon unless the economy starts showing improvement and signs of high inflation start appearing. Thus, the government was confident its actions will not have any impact on the private sector that still have cheap access to funds and many of whom will start pursuing growth themselves as well as they see signs of improvement in the economy.