3) Read the following two article from the Novermber 19, 2009 issue of The Econo

Question

3) Read the following two article from the Novermber 19, 2009 issue of The Economist

Article 1: "Dealing with America's Fiscal Hole"

http://www.economist.com/node/14915152

Article 2: "America's Fiscal Deficit: Stemming the tide"

http://www.economist.com/node/14903024/print

Use what you learned from these articles to answer the following questions. Please explain your answers fully and use insights from the articles to support your answers.

a) Why is it important for the Obama administration to clearly lay out a plan showing how they intend to deal with America's long term fiscal problems? Specifically, how might lack of clarity affect buisness confidence or intrest rates?

b) The article argues that "America's deficit problem is in essence a spending problem". Briefly outline three ways the article suggests to bring down spending.

c) What percentage of total outlays are devoted to non-defense discretionary spending?

Explanation / Answer

a) it is important for the Obama administration to clearly lay out a plan showing how they intend to deal with America's long term fiscal problems because

1) A giant hole has opened in the budget because of stimulus, bail-outs and a recession that has savaged economic growth and tax revenue.

2) The fiscal conditions in future are uncertain. Lack of clarity affect buisness and may create fiscal deficit in years to follow.

3)Uncertainty over how taxes may be raised to shrink deficits may is affecting business confidence.Worries about inflation or default could start to push up interest rates.

4) so a credible plan from the administration would reassure markets and allow an orderly exit from fiscal stimulus.

b)Three ways the article suggest to bring down spending are:

1)Raising the retirement age for Social Security and Medicare would save money while encouraging Americans to work longer, thereby expanding economic potential.

2)Medicaid could be converted to block grants, compelling states to assume more of the burden of cost control.

3)Other spending should also be vigorously squeezed, to stop federal funds being wasted on highways of dubious value or trade-distorting farm subsidies.

c)one-sixth of total outlays

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