Custom «Fiscal Policy and Presidential Elections» Essay Paper Sample

Fiscal policy refers to government tax and spending changes made to improve economic performance (Brux, 2007). These changes can be used to generate more jobs and an economic expansion during recession. Government tax and spending changes can also slow down spending to help counter inflation. In general, the discretionary fiscal policy is one commonly applied fiscal policy and involves the national government deciding to cut taxes during a recession and then passing a tax cut bill (Brux, 2007). This would result in greater consumer spending. Alternatively, the government can pass a bill to increase its expenditures. In either case, there would be more spending in the economy, increased production by businesses to meet this additional demand and more workers hired. During time of inflation, these policies would be employed in reverse. Tax increases and cuts in government spending reduce the amount of money people have to spend. This reduces total demand and inflationary pressures in the economy.

History provides numerous instances where discretionary fiscal policy was employed to improve economic performances, and rarely to dampen an economy that is running too hot. The presidential re-election opportunities (in case of an incumbent president) are enhanced by the production of a precise set of inflation and unemployment rate outcomes leading up to election (Anderson, 2008). Political policy cycles are alleged to arise because presidents applied discretionary fiscal policy and pursued expansionary fiscal policies just before elections; policies for which they must have to compensate after the election (Alfred & Charles, 2000). This political policy cycle induces a political business cycle, characterized by failing unemployment rates before the election, and the rising rates thereafter.

An expansionary fiscal policy is usually employed and it is aimed at increasing the combined demand such that the economy of the nation operates at full employment output level. In an event whereby the economy is operating at full level employment, the application of an expansionary fiscal policy will result to increased price level with not change the real Gross Domestic Products. Therefore, supposing that fiscal policy changes output faster than it changes it changes the price level, the real GDP grows and this is to the advantage of the incumbent government.

Discretionary fiscal policy is therefore criticized on the bases that it can be manipulated for political reasons and thus creates rather than mitigate business cycles. Studies have shown that high unemployment levels right before an election will hurt incumbents and help challengers (Anderson, 2008). Politicians will therefore tend to expand the national economy just before an election year; then, tight fiscal policies have to be employed to slow down the economy when inflation becomes a problem after the election.

Regression analyses have proved that the Fiscal Policy can be politically manipulated and controlled. These analyses have revealed a sizable cycle in money growth corresponding to presidential elections. In addition, while other factors influence money growth, the significance of the cyclical effect does not depend on a particular specification of the regression equation (Alfred & Charles, 2000).