American government. draft a paper that critically analyzes a current, domestic

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Current situation in the US articulates that real GDP is below its full employment potential and hence there is currently a recessionary gap. Unemployment rate is higher than its natural rate of 4.9% while inflation hovers around 2%. This situation calls for an expansionary fiscal policy. With the Presidential elections in near future, every political evet will revolve around this issue, to unleash the economy.

Fiscal expansion will stimulate Aggregate expenditure. Theoretically, with stimulated Aggregate expenditure AE, IS shifts to the right exhibiting a rise in income levels. With more income, the quantity of money demanded increases with fixed money supply. Hence the interest rate rises and both money market and goods market achieve a new equilibrium where both interest rate and income level are higher.

For the new incoming government, a deficit budget should be a concern. A budget deficit though helps in stabilizing the economy. During the course of business cycle, budget deficit might rise or fall. And with the recovery in phase, tax revenue may rise simultaneously thus decreasing the budget deficit.

One of the largest spending programs where the future politics will be revolving are Social Security and Medicaid and these programs primarily transfer wealth to the elderly and not to the poor. Therefore most federal government purchases of health-care go to elderly. Social Security (as of 2010) is about 20% of federal spending and federal spending is about 25% of U.S. GDP. This means Social Security is approximately 5% of GDP. Therefore, interest on the debt as a percentage of GDP could be slightly greater than the respective share of Social Security.

Rising over-65 population is one of those striking features of U.S. economy which has troubled the federal government over the years. Medical procedures are developed, birth rates falling, medical innovations are being carried out and all of these developments have increased the longevity of life. Retired Americans are now healthier as well as wealthier than their predecessors. That is why the over-65 population is increasing so much.

There is a direct and robust relationship between the increasing over-65 population and increase in projected increase in federal spending on Social Security. Federal government provides medical coverage to all retired Americans who are over-65 years. Hence if their population is increasing, the fraction of GDP going towards Social Security and Medicare programs is ought to increase.

When economists project the path U.S. fiscal policy over the next several decades, they present a gloomy picture of the economy. They attribute this scenario to two factors:

Demographics: Technological advancement in medical field has caused two entirely distinct yet interrelated effects. While the increase in the life expectancy has increased the number of elderly on one side, improved birth control measures has reduced the number of children people can have.

This implies a small working age population (which also implies a reduced contribution in tax revenue) and a large elderly population (which suggests an exigency of increased government spending through Medicare and Medicaid). With time, riding expenditure and falling revenues indicate that the government expenditure will rise over time.

Mounting health care cost: The cost of Medicaid and Medicare program has been rising overtime. Since the government runs these programs, it’s spending rises as the cost of health care rises. Though many reforms have been implemented to reduce the burden of lawsuits, encouraging competition among health care providers and promoting advance technology. Yet economists are skeptic about its impact.

The combination of aging population and rising health care costs will have a major impact on the federal budget. And it is believed that spending on these programs will rise to about 20 percent of GDP over the next half century.

Specifically, there are concerns over Medicare. U.S. population is growing at a constant rate and most people of the baby boom generation will retire soon. as the number of elderly is growing faster than the number of young workers, the amount of tax collected as Social Security is likely to fall short of the amount required to pay for Medicare and Medicaid. It is in this sense that, Medicare is anticipated to become insolvent in almost a decade. Government, therefore, must find ways to finance it by other revenue channels.

It seems plausible that the payroll taxes levied to fund Social Security and Medicare programs will contribute more in near future. Their contribution in recent years has been much smaller in generating federal revenue than usual owing to the fact that there was a temporary cut in the payroll taxes so as to stimulate consumer spending during the recession of 2007-2009.

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