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The Capitalist Business Cycle (how gov. reacts)

Posted by Neda on November 14, 2001 at 14:32:42:

In Reply to: The Capitalist Business Cycle posted by Eleanor on November 11, 2001 at 22:40:33:

The irony of the whole situation is the manner in which the government comes to the aid to the economy when companies become pessimistic and stop spending. As it was said earlier, the companies create their own self-fulfilling prophecy when they cut back on spending because that causes other companies to cut back, and a whole domino effect begins. The question was posed of what the government could do to reduce these negative effects, but I would like to address the irony of what the government's fiscal policies actually do. In order to combat a recession, the government institutes its fiscal policies, which include lowering taxes and increasing government spending. The irony in these policies is that they end up rewarding the big corporations that started the problem in the first place. (We can see that the big corporations started the problem because they are the only big economic actor that can save money. The average consumer is hugely indebt, showing that consumers spend most of the money that they have. The government also spends most of the money that it has. Thus it is the decisions of big corporations that decide how the economy will flow.) Now back to the irony- By lowering taxes, it makes it cheaper for businesses to invest and produce goods. The other part of the government's fiscal policy is to spend money (in the place of the big corporations) to boost the economy. But where does this money come from? It would be self-defeating for the government to raise taxes, so instead they borrow money to reinvest in the economy. But the government ends up borrowing money from big companies. If effect they reward the same business that started the problem with huge interest payments on the money they borrowed. Some figures say that 13% of our tax money is given to the big corporations that own our national debt.
The fiscal policies are just meant to get enough money flowing in the economy again that companies will then reinvest. I don't know how this could be done, but maybe if the government instituted a policy of taxing away money from the corporations that hold it back and spend it for them, the corporations would not as quick to hold back, and start the negative effects of a recession.




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