Macro Economic Policy: Democrats Vs Republicans - Essay Example

? Macro Economic Policy: Democrats Vs Republicans Introduction For the analysis and comparison of the macroeconomic policies of Democrats and Republicans, it is important to assess the impacts of such policies on employment, inflation and economic growth. This is because the taxation policy of the government and public spending are the important fiscal measures used by the government for revival of economy and sustainable development. The fiscal policies and monetary policies of the Federal Reserve should be compatible with the fiscal measures to achieve the intended objectives of the government since Federal Reserve regulates interest rates and supply of money for achieving the same results. This paper seeks to study the economic policies of Democrats and Republicans and their impact on economic development. Political ideology and economic policies According to 2012 Republican Platform (1) “Excessive taxation and regulation impede economic development. Lowering taxes promotes substantial economic growth and reducing regulation encourages business formation and job creation.” Republicans believe in taxing only for the government’s essential functions. The republicans favor fiscal responsibility and an end to deficit spending. “Government spending and regulation must be reined in (Ibid, 1)...federal programs must contribute to the deficit reduction necessary to put our country back on a sound fiscal footing … (Ibid, 17). But, Democrats have accuse that “The Republican Party has turned its back on the middle class Americans who built this country… follow the same path of fiscal irresponsibility of the past administration—giving trillions of dollars in tax cuts weighted towards millionaires and billionaires while sticking the middle class with the bill” (2012 Democratic National Platform) and this statement reflects their stand on taxation and public spending. Taxation and public spending are the two important tools the government can use in regulating the economic development to achieve its objectives. Republican National Convention (i) states “Every voter will be asked to choose between the chronic high unemployment and the unsustainable debt produced by a big government entitlement society, or a positive, optimistic view of an opportunity society.” Therefore, inter alia the parties’ policies on these two aspects, taxation and public spending, are fundamental factors in macroeconomic analysis. Real GDP Economic analysis using Real GDP is more reliable since GDP is adjusted for inflation and reflects the economic picture in constant dollar terms which makes comparisons meaningful. In the USA “Real GDP increased at an annual rate of 2.5 percent in the first quarter of 2013” (Trading Economics) compared to 0.4 per cent in previous i.e. the fourth quarter of 2012 (Exhibit 1). The recession during 2007-2009 was very severe in American history. “Congress and the Bush Administration enacted the Economic Stimulus Act of 2008 (P.L. 110-185). This act was a $120 billion package that provided tax rebates to households and accelerated depreciation rules for business” (Elwell, 3). The stimulus package had a positive effect on economy resulting in recovery of economy and reflected in real GDP from the later part of 2009. Exhibit 1 Federal Reserve Federal Reserve exercises control over monetary system through regulation of interest rates and money supply. The fiscal measures taken by the government should be complemented with monetary policies for achieving the economic objectives of a country. Republican National Conventions (4) states “The philosophy and policy of Federal Reserve Inflation diminishes the purchasing power of the dollar at home and abroad and is a hidden tax on the American people. Moreover, the inflation tax is regressive, punishes those who save…” whereas Democrats state “We will raise the minimum wage, and index it to inflation” (2012 Democratic National Platform). When the economy is in downturn, reducing the interest rates and increasing supply of money are essential for revival of the economy. Elwell (2,3) observed “To bolster the liquidity of the financial system and stimulate the economy, during 2008 and 2009 the Federal Reserve (Fed) aggressively applied conventional monetary stimulus by lowering the federal funds rate to near zero and boldly expanding its “lender of last resort” role…In the spring of 2009, the Fed judged that the economy, which remained in a recession, still needed additional stimulus.” Labor market Evans (18) stated “Short-run fluctuations in the unemployment rate are closely tied to changes in real GDP, but long-run levels of unemployment are more closely related to the overall productive capacity of the economy.” Unemployment data and jobless claims published periodically provide status of the labor market conditions to the employers to enable them to make analysis for planning recruitment or retrenchment as the case may be, and in the latter case jobless claims increase. Therefore, the level of benefits provided to the unemployed is also an important determinant of labor market conditions. Though inflation is a monetary phenomenon, growth in unit labor cost is linked to inflation in the short run, because increase in wages contributes to the increase in unit labor cost. If the productivity of labor increases, inflation will come down. However in practice linear relationship between wages and productivity is very difficult to establish due to impact of monetary and fiscal policies. While Democrats are for minimum wages, Republicans believe in free market system of labor. The labor force participation is an important element that is influenced more by demography and social developments than wages. Finance and banking regulation and reform Democrats are in favour of tightening finance and banking regulations to prevent financial crisis in future. But, “Most Republicans say the reforms represent a costly over-reach of government’ (Drawbaugh). However, a compromising attitude could be observed between the parties in the background of 2008 bailouts of AIG and the Lehman Brothers bankruptcy. But, many of the reforms hotly debated in the aftermath of subprime crisis are now in the back burner. “Many of the laws that Congress passed to rein in big banks in the wake of the 2007 financial meltdown have yet to go into effect, but lawmakers are already working to dismantle them. And it's not a partisan thing either” (Eichelberger) This statement may be compared with the accusation of Democrats: “Mitt Romney and the Republicans would roll back financial reform and let Wall Street write its own rules again” (2012 Democratic National Platform).  The influence of Wall Street in policy making has been a cause for concern among the public. Tax reforms and policy changes Republicans favor simplification in tax system without affecting family farms and keeping taxation, litigation, and regulation to a minimum. Republican National Convention (2) “We reject the use of taxation to redistribute income, fund unnecessary or ineffective programs, or foster the crony capitalism that corrupts both politicians and corporations.” While opposing tax cuts to rich and the type of tax reform supported by Mitt Romney, “President Obama and Democrats in Congress cut taxes for every working family, putting more money in the pockets of Americans who need it most.” (2012 Democratic National Platform) Fiscal cliff bill reflects the Democrat’s policy of taxation. Fiscal cliff bill “makes permanent the Bush administration's tax cuts for individuals earning less than $400,000 per year and couples earning less than $450,000… It raises rates on those who make more than that from 35% to 39.6%, bringing back a top tax bracket from the Clinton administration” (Smith). The fiscal cliff Expiring tax cuts coupled with cuts in public spending by the government will severely reduce the income level of the people in the economy. The strategy of reducing the federal budget deficit by this process could affect employment severely and cause slump in demand in economy. While Democrats favour increased taxes on wealthy, Republicans are in favour of spending cuts in social welfare especially, Medicare. Though President Barack Obama has signed into law a bill to avert the fiscal cliff in January 2013, achieving the objectives of long term gains in terms of lower budget deficit, lower debt and higher economic growth is highly debated. According to Krugman there is “…on the plus side, extended unemployment benefits and more infrastructure spending. But no payroll tax cut extension, which means a fairly big dose of austerity despite the deal.” The fear of fall over the cliff due to increasing unemployment is founded on expectations of financial turmoil and recession. “Economists had predicted the combination of those tax increases and spending cuts could have thrown the U.S. economy back into recession and driven unemployment back into the 9% range” (Smith). Immigration policy Ekins stated that according to a poll, while Democrats believe that immigrants contribute significantly to the economic growth of the nation, Republicans are sceptical about it, though there is no controversy over legal residents and citizens of any origin. However, according to the Republican National Convention (7) they encourage “a policy of strategic immigration, granting more work visas to holders of advanced degrees in science, technology, engineering, and math from other nations.” Democrats call for immigration reform for visas based on the country’s needs and accused Republicans of blocking it in Congress.  International trade goals  Republicans are wary of the Democrat Administration’s way of dealing with infringement of intellectual property rights of Americans by other countries especially, China, its manipulation of currency, subsidies given to domestic companies to avoid foreign competition and other violations of world trade standards calling the government’s attitude as a virtual surrender (Republican National Convention, 6). Whereas, Democrats claimed that their government re-built the country with American steel and manufactured goods wherever feasible in line with the international obligations. If dollar is undervalued in relation to other countries productivity is reduced with increase in inflation. Overvaluation of dollar will affect export growth. Americans have an edge in technology which is reflected in the profile of the products exported which include high tech products, semi-conductors and telecom equipments due to comparative advantage. The country has to ensure stability in exchange rate to ensure growth and expansion of these industries and fight for reducing restrictive trade practices adopted by the countries internationally. Energy development and environmental issues Both Republicans and Democrats have recognized the importance of energy development and the environmental issues associated with it. However, the government needs to be proactive in investment on clean energy developments by making huge investments. This planned expenditure will also be very useful for the revival of the economy through creation of more employment while ensuring sustainable economic development in the long run. While Republicans advocate partnerships between traditional energy industries and emerging renewable industries for development in this area Democrats claim that “Historic investments in clean energy technologies have helped double the electricity we get from wind and solar. New emissions and fuel efficiency standards for American cars are reducing our oil use…” (2012 Democratic National Platform) Implications of the implementation of Obamacare The Patient Protection and Affordable Care Act (PPACA) called as Obamacare was introduced to increase the health insurance coverage and reduce the cost of health care. Under this act the insurance companies have to offer same rates to people regardless of pre-existing conditions or sex. However, controversies in implementation with various provisions involving increase in premium make the ‘affordability factor’ questionable. According to the cost estimates of the premier insurance companies, health insurance premiums under Obamacare will grow an average of 100 to 400 percent (The Examiner). However, it is also important to note that any social welfare measure undertaken by a government has to face several practical issues in implementation. These issues will hopefully be sorted out in the future to make the system more effective. “The Affordable Care Act is not the end of efforts to improve health care for all Americans. Democrats will continue to fight for a strong health care workforce with an emphasis on primary care” (2012 Democratic National Platform). Conclusion The policies of a government with regard to taxation and public spending are the important factors which have impact on the economic development of the country. These policies vary significantly in the case Democratic and Republican parties. The macroeconomic policies of the government with regard to these important factors influence employment generation, capital formation, social welfare and international trade.  The achievement of the objectives of the monetary policies of the Federal Reserve in respect of employment, inflation and moderate long term interest rates largely hinges on sound fiscal policies of the government. Taxes and public spending need to be regulated both by the Democrats or Republicans based on various economic indicators and the status of the economy. For example, under the recessionary conditions in the economy, decreasing tax rates and increasing public spending are essential for revival of the economy. However, reversal of the policy may be needed to avoid overheating of the economy. Similarly, flexibility and balancing in the case of monetary policy with regard to interest rates and money supply in tune with the fiscal policy is necessary for sustainable economic development. References 2012 Democratic National Platform. “Moving America Forward.” Web. 13 May 2013 Drawbaugh, Kevin. “Democrats chip away at GOP on financial reform.” Reuters. April 16, 2010. Web. 13 May 2013 Eichelberger, Erika. “Democrats Are Undermining Wall Street Reform, Too.” Mother Jones, April 3, 2013. Webt. 14 May 2013 Ekins, E. “Democrats Say Immigrants Grow the Economy, Republicans are Skeptical.” Reason Foundation, April 2, 2013. Web. 14 May 2013. Elwell, Graig, K. “Economic Recovery: Sustaining U.S. Economic Growth in a Post-Crisis Economy.” Congressional Research Service, April 18, 2013. Web. 14 May 2013 Evans, Michael, K. Macroeconomics for managers. Malden: Blackwell Publishing 2004. Krugman, Paul. “The Conscience of a Liberal.” The New York Times, December 18, 2013. Web 14 May 2013 Republican National Convention. “2012 Republican Platform.” Web. 13 May 2013 Smith, Matt. “Obama signs bill warding off fiscal cliff.” CNN, January 3, 2013. Web. 14 Mau 2013 The Examiner. “Insurers predict 100%-400% Obamacare rate explosion.” May 14, 2013. Web. 15 May 2013 Read More