Government Spending Changes- Discussion Essay.
Government spending over the past has tremendously changed owing to the shifts in the micro and macroeconomic factors and the expansion of the government and its activities. In reference to the article provided, the hallmark of the changes is that government spending on transfer payment has spiked over time in the years after the 1960s (Taylor, 2012). Government Spending Changes- Discussion Essay.Transfer payment, in this case, refers to money spent on individuals without any gain in exchange. Statistically, the expenditure on transfer banking such as social security was registered at three times that of investment. What this means is that government spending is now prioritizing welfare needs as opposed to investing in long-term economic growth (Summers, 2014).
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The increase in transfer payment rose dramatically in the late 1960s and late 1970s mainly because of the launch of the popular health insurance programs (medicare and Medicaid) and other welfare programs. Government Spending Changes- Discussion Essay.
Spending on investment declined from a third of the government spending to a sixth, and the portion has gradually declined over time. More so, government spending on transfer payment increased from 15% to almost 50% in the wake of the new millennium (Metcalfe, 2018). Simply put, investment expenditure has significantly dropped while transfer payment has been on the steady rise. Economists argue that the increase in population, unemployment, and the rise in the cost of living is the primary cause of the rising spending in transfer payment. In this regard, the steady increase in transfer payment has created concerns on economic growth, especially in the long-term view. In the economic recession of 2007-2008, this spending trend led to an increase in the percentage of the GDP (Taylor, 2012). Government Spending Changes- Discussion Essay.The spending consequently impacts economic growth in several ways.
Analyzing the impacts of these changes on economic growth draws on the various models of economic growth and how the various forms of spending impact growth. Both the classic and neoclassic theories of economic growth agree that lack of savings and investment, together with increased spending on transfer payment are not healthy for the economy. Initially, with the economic recession, the economic expenditure on general products also dropped. The hard economic times in the aftermath of 1960s were characterized by a fall in incomes, loss of jobs and low-standards of living. This then translates to more people qualifying for the welfare benefits that government spending has to prioritize (Breunig & Busemeyer, 2012). As such, the government has no alternative than to prioritize the welfare at the expense of developing the elements of economic growth. With this situation, there are no savings in the backbone of the economy as would be expected. Lack of savings means no investments, and this hampers economic growth. Government Spending Changes- Discussion Essay.
The Basic growth model also explains how overspending on transfer payment affects long-term economic growth. Transfer payment in this case negatively impacts the national output. National output is made up of all sources of income, labor sources and development of capital depends on these factors to stimulate economic growth. As government spending is wholly directed to transfer payment, there is minimal capital development to stimulate economic growth. According to the aggregate production function, capital stock and labor supply are the builders of economic growth (Taylor, 2012). In this economic growth model, growth in labor force and capital stock always translate to positive economic growth. Going by this neglected spending in these elements ultimately derails the economic growth of a country.
Research in economic growth has also conclusively stated that capital accumulation is a crucial driver of economic growth. The Solow Economic Growth Model illustrates this from the premise that a sustained increase in or the rise in capital investment promotes economic growth temporarily (Metcalfe, 2018). Government Spending Changes- Discussion Essay. This is essential because the capital to labor ratio also goes up providing a base for economic growth in the long-run. However, with the conglomeration of several segments of capital such as natural resources, regional resources, and technology, enables the economy to gain a steady long-term economic growth trend. The application of this theory in the changes in government spending after the 1960s explains the sluggish economic growth rate for the period leading up to the years after 2000s. For as long as government spending does not prioritize expansion on capital and the infrastructure of economic growth, the economy either stagnates or deteriorates.
These trends in government spending act as red lights to the stunted economic growth. Over the past two decades, government expenditure on social services has shot up due to demographic factors. At the root of this, the increase in root wages and the rise of unemployment rates led to the downturn of the economy. Automatically, the re-composition of the government’s spending towards transfer payment has led to the neglect of the drivers of economic growth. The various theories of economic growth as highlighted, therefore, effectively demonstrate how constraining government spending has become on economic growth (Summers, 2014). The bottom line of these theories is that more government spending on transfer payment than investment hampers economic growth. So by this analysis, one can conclude that the current system of government spending is bound to cause slow and feeble economic growth. Government Spending Changes- Discussion Essay.
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References
Breunig, C., & Busemeyer, M. R. (2012). Fiscal austerity and the trade-off between public investment and social spending. Journal of European Public Policy, 19(6), 921–938. https://doi.org/10.1080/13501763.2011.614158
Metcalfe, S. (2018). Evolutionary theories of economic and technological change: present status and future prospects (Vol. 44). Routledge.
Summers, L. H. (2014). US economic prospects: Secular stagnation, hysteresis, and the zero lower bound. Business Economics, 49(2), 65–73. https://doi.org/10.1007/978-1-137-57251-6_38
Taylor, T. (2012, August 2). Entitlements, Public Investment, and the Changing Nature of the U.S. Government. Retrieved November 5, 2018, from https://conversableeconomist.blogspot.com/2012/08/entitlements-public-investment-and.html. Government Spending Changes- Discussion Essay.