Each year since winning control of the House of Representatives in the 2010 elec

Question

Each year since winning control of the House of Representatives in the 2010 election, Tea Party Republicans have argued that we need to immediately initiate sharp reductions in government spending and entitlement programs and rapidly move towards a balanced budget, (although they have never actually produced a budget proposal in which tax revenues would match government spending plus entitlement transfers). Many Democrats, while arguing that tax rate increases on high income earners need to be part of the any deficit reduction program, have agreed that we need to initiate budget deficit reduction now.

A) What is the argument against attempting to balance the Federal Government budget rapidly at the present time via either deep cuts in Federal Government spending or sharp increases in federal income tax rates?

Explanation / Answer

The economy of United States had still not recovered fully from the Great Recession of 2008-2009. As recovery process is still going on, revitalization of aggregate demand is the need of the hour. In such scenario, if attempts to balance the federal government budget in rapid manner is made, either through deep cuts in federal government spending or sharp increase in federal income tax rates then either of these steps will adversely impact the aggregate demand and will inflict serious damage to all the efforts taken till present time period to pull the economy back to normal course.

Either of these steps will reduce aggregate demand and as everybody knows that when aggregate demand decreases, aggregate output in economy decreases and unemployment rises.

So, these steps can once again push the US economy towards recession. With recovery process still in progress, this pushback can multiply the economic pain by many-a-times and would also prolong the period of full recovery.

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