What are the advantages of using expansionary fiscal policy to stimulate economic growth?

O efeito multiplicador (keynesiano) básico exagera o impacto do gasto do governo por alguns motivos. Ele desconsidera o efeito do déficit público sobre os juros, e a consequente “expulsão” (crowding-out) do investimento privado na demanda agregada. Ele também não considera o impacto sobre o câmbio real e as exportações, um canal muito importante para economias abertas. Assim, o gasto público se mostra como uma alternativa para estímulo da economia apenas quando há uma crise séria de colapso da demanda efetiva, como ocorreu em 2008 na crise financeira internacional. Nesses casos a demanda privada não responde mais a juros, e o governo pode reestabelecer a demanda via gastos autônomos.

Expansionary fiscal policy, employed by governments to stimulate economic growth, has several advantages, particularly when compared to monetary policy. Fiscal measures can be designed to target specific sectors or areas in need. For instance, increased spending on renewable energy infrastructure projects not only boosts overall demand but also creates jobs, improves long-term productivity, and creates a clear signal to the rest of the world that the country views this as a long-term strategy. In contrast, monetary policy generally affects the entire economy and may not address specific areas that need the most support.

📌Increased government spending: This can involve infrastructure projects, hiring public sector workers, providing subsidies to businesses or directly injecting funds into social programs. The injected money circulates in the economy, leading to increased demand for goods and services. 📌Tax cuts: By reducing the tax burden on individuals and businesses, the government leaves more money in their pockets, potentially leading to increased consumption and investment.

One thing to note is where government spends its money matters (similar to tax cuts). The multiplier effect for military spending is is different (smaller) than that for infrastructure for instance.

In some instances, i would argue fiscal policy is more effective in closing an output gap or getting an economy closer to full employment. This is especially true if governments have the fiscal capacity to do so and if fiscal expansion helps improve an economy's productive capacity. But this could get tricky if the capacity does not exist and if fiscal policy isn't used in a countercyclical manner. Also, an assessment of what share of deficits are structural and what share are cyclical is also good to know. Whatever option(s) is/are chosen, it is vital that fiscal and monetary policy responses are coordinated to limit unwanted side effects.

📌Stimulates economic growth: Increased spending and aggregate demand can lead to higher GDP, output, and employment. 📌Reduces unemployment: Increased economic activity can lead to new job creation, benefiting individuals and reducing societal costs associated with unemployment. 📌Boosts consumer confidence: Increased spending and economic activity can create a more optimistic economic climate, encouraging further investment and spending.

Increased investment: When businesses see that consumers are spending more, they are more likely to invest in their operations, expanding their workforce and creating more jobs. Reduced unemployment: As businesses invest and expand, they need more workers, leading to a decrease in unemployment. Improved infrastructure: Government spending on infrastructure projects, such as roads, bridges, and public transportation, can improve the quality of life and economic activity. Counteracting recessions: Expansionary fiscal policy can help to stimulate economic growth during recessions, preventing or mitigating their severity.

Advantages of Expansionary Fiscal Policy: Job Creation: More government spending can lead to increased employment opportunities. Economic Growth: Stimulates overall economic activity and supports GDP growth. Consumer Confidence: Tax cuts may boost consumer confidence and spending.

A literatura econômica é bastante clara que para pequenas economias abertas (como as economias emergentes, ou mesmo desenvolvidas de menor porte) o multiplicador do gasto é zero. A expansão fiscal pressiona o mercado de crédito, atraindo poupança privada que seria usada para investimento. A taxa de juros se eleva, e junto com a queda do investimento há atração de poupança externa (em dólares) apreciando a moeda. Isso torna o câmbio real mais forte, estimulando importações e desestimulando exportações. No final houve apenas modificação da composição da demanda agregada, sem efeitos de estímulo. No caso de economias endividadas o efeito pode ser até negativo, com a queda de investimento e exportações superando o aumento do gasto público.

Increased Budget Deficits and Debt: Expansionary fiscal policy can lead to increased government spending, which can put a strain on the government's finances and result in widening budget deficits and higher government debt levels. This can raise concerns about the government's ability to service its debt Inflationary Pressures: If the government injects too much money into the economy, it can lead to excessive demand and inflation. This can erode purchasing power, harm consumer spending, and make it difficult for businesses to plan for the future. Crowding Out Private Investment: When the government increases its borrowing, it can drive up interest rates, making it more expensive for businesses to borrow money.

Inflation Risk: Excessive demand may lead to inflationary pressures. Budget Deficit: Increased spending without revenue may widen fiscal deficits. Time Lag: Policy effects may not be immediate; there could be a time lag.

Comme indiqués dans l’article, la politique budgétaire présente deux défauts majeurs : elle prend du temps et elle augmente le déficit public. En démocratie, mettre en place une politique budgétaire est donc un projet difficile car il est probable que ses bénéfices ne soient pas visibles durant le mandat. Le prochain chef d’État pourrait s’en approprier les bénéfices. L’autre problème concerne le déficit public. Réduire le déficit était l’un des objectifs des pays de l’UE. Mais cela signifie qu’en cas de crise, les gouvernements se retrouvent démunis. Cette politique semble avoir évoluée depuis la crise sanitaire. La France et l’Espagne par exemple ont investi dans un plan de relance massif.

Para economias abertas a política monetária, com regimes de câmbio flutuante, é a principal alternativa para estimular a demanda agregada. Cortes de juros e expansões do nível de crédito estimulam o consumo e o investimento privado doméstico. Além disso, com juros mais baixos há depreciação da moeda, favorecendo exportações vis-a-vis importações. O grande risco, nesse caso, é de inflação através do aumento da oferta de moeda. Por isso tanto esforço tem sido feito nas últimas décadas para a montagem de modelos institucionais com regras para a expansão monetária.

📌Monetary policy: Central banks can use interest rate adjustments and quantitative easing to stimulate borrowing and investment. 📌Structural reforms: Policies aimed at deregulation, improving education and labor markets, and fostering competition can improve long-term economic growth. 📌Supply-side policies: Measures like tax breaks for research and development or investments in infrastructure can boost productivity and potential output.

Monetary Policy: Central banks regulate interest rates to influence borrowing, stimulating investment and consumption. Supply-side Economics: Reduces taxes and regulations, encouraging production and economic growth. Free Trade: Promotes open markets, driving down prices, improving efficiency, but potentially causing job losses. Labor Market Policies: Train, employ, and regulate labor, enhancing productivity but risking higher unemployment if poorly designed. Structural Reforms: Improve education, infrastructure, and governance for long-term growth but are challenging and time-consuming. The choice among alternatives depends on specific economic conditions and potential benefits vs. risks.

📌Expansionary fiscal policy can be a useful tool for stimulating economic growth, but it comes with potential drawbacks like budget deficits and inefficiency. 📌The effectiveness of such policies depends on factors like economic conditions, policy design, and implementation. 📌A balanced approach combining fiscal and other policy tools is often recommended for sustainable economic growth.

Furthermore, details matter: what are the causes of the output gap (demand shock/supply shock) and how government spending (tax cuts) address these causes. Furthermore, how the policies are implemented matter. Finally, it maters if fiscal policy would achieve your goal better/faster than alternative policies - like monetary policies

🤔 Imagine a sluggish economy, like a car stuck in mud. Expansionary fiscal policy acts like a tow truck, injecting money into the system. Increased government spending on infrastructure creates jobs, boosting consumer confidence and spending. Tax cuts leave more money in people's pockets, further fueling consumption and business investment. The car starts moving, pulling the entire economy out of the rut. 👉 Criticisms: 1. Crowding Out: Government spending can displace private investment, hindering long-term growth. 2. Debt Burden: Excessive deficits can saddle future generations with crippling debt. 3. Poorly targeted spending can be wasteful and ineffective. 4. Short-term political gains can lead to irresponsible fiscal expansion.

Imagine a government as a chef; it can either spice up the economy with more spending or add sweetness with tax cuts. However, too much spice (spending) might make the economic dish too hot (inflation), and too much sugar (tax cuts) can lead to a budgetary toothache (deficit). It's a delicate recipe!

Expansive fiscal policy has its advantages in supporting the economy. However it shouldn’t be looked at in isolation vs monetary policy. The most complex situation is when fiscal policy contradicts monetary policy. For example what we saw over 2023 with dramatically restrictive monetary policy alongside extraordinary expansive fiscal policy. It’s made the job of central bankers in their fight against inflation very complex.

expansionary fiscal policy directly stimulates aggregate demand by increasing government spending or reducing taxes. This leads to higher consumption, increased investment, and economic growth. The benefits of expansionary fiscal policy include accelerated economic growth, reduced unemployment, increased investment, and support for social programs. Examples of expansionary fiscal policies include stimulus packages, infrastructure investments, and targeted relief measures. It's important to carefully design and implement these policies to ensure their effectiveness and mitigate any potential negative impacts.

No hay que olvidarse de mencionar, que una política fiscal expansiva, que inyecta dinero en la economía a través del aumento del gasto publico. Puede ser una política económica altamente inflacionaria, más aún cuando se sale del circulo virtuoso.