Chapter 8 - Stablization Policy

http://www.financialpost.com/scripts/story.html?id=1437494

Summary

Stimulus packages come with dangerous precedents. The last time we tried to fix economy with cash infusion, we got soaring inflation and shrinking GDP. In the US and Canada and other countries, they released trillons of dollars of economic stimulus packages on the world's teeterering financial system which may be helpful to recall that the last the government tried to fix the economy with borrowed money, it made the problem worse. Governments beleived that by forking out the fiscal stimulus by injecting money, it could solve the problem... for now. The fiscal stimulus could also get the patient running and boost employment. But this comes with a haunting tax debt a generation later.

Connections
This article talked about Stagflation and Fiscal policies and how they seem to stabilalize the economy. If unemployment were seen as the major economic problem, the government would endeaveour to increase their spending or reduce the level of taxation. This is what the article suggests to do. But it comes with consequences generations later as the taxpayers will have to pay more eventually. People are actually in stagflation so they are in a situation of depressed levels of real output in the economy combined with rising prices. We know that this was used in the 1970s and it was a product of failed government policy. The type fo fiscal policy the article predicts that we are going to have is discretionary fiscal policy because the governemnt seems to want to improve economic conditions by changing the level of government spending and taxation.

Reflection
The government should inject the fiscal policy into the economy because the economy is already really horrendous. It is better to do it than not to do it at all and wait for someone else to come up with a better idea while the economy is near stagflation. By borrowing a lot of money, they are also increasing their debt in the future and high tax rates will come. Also, Central banks responded by jacking up their interest rates so that they can make up for their mortgages which hurts the economy even more. This situation is pretty hard to stabilize.