Evolution of Fiscal Policy

Brief History of Fiscal Policy in the US
Prior to the 1930s, fiscal policy was seldom used because classical economics was widely dominant. For economists at the time, the best way to ensure prosperity was to allow the market to move on its own, or laissez faire. But with the Great Depression, a condition of severe economic contraction which lasted for four (4) years, the government could no longer sit back and wait for the market to adjust. It became apparent that the economy needed new resources, and the government had to take on a much larger role in stimulating the market. Government started to spend on infrastructure in order to employ its people, it lent new capital to ailing businesses and then instituted a taxation system to ensure that new funds are available. ADDIN CSL_CITATION { "citationItems" : [ { "id" : "ITEM-1", "itemData" : { "author" : [ { "family" : "McEachern", "given" : "William A." } ], "edition" : "2nd ed", "id" : "ITEM-1", "issued" : { "date-parts" : [ [ "2010" ] ] }, "publisher" : "Cengage Learning", "title" : "ECON Macro", "type" : "book" }, "uris" : [ "/documents/?uuid=1fce4bfb-ceee-4b41-be60-e6d95730a455" ] } ], "mendeley" : { "manualFormatting" : "(McEachern, 2010, p.181)", "previouslyFormattedCitation" : "(McEachern, 2010)" }, "properties" : { "noteIndex" : 0 }, "schema" : "https://github.com/citation-style-language/schema/raw/master/csl-citation.json" }(McEachern, 2010, p.181). With new resources entering the market through fiscal policy, the economy was restored. To ensure that such depression would no longer happen, the government instituted "progressive income tax, unemployment insurance, and welfare benefits…[to serve as] income distribution programs" ADDIN CSL_CITATION { "citationItems" : [ { "id" : "ITEM-1", "itemData" : { "author" : [ { "family" : "McEachern", "given" : "William A." } ], "edition" : "2nd ed", "id" : "ITEM-1", "issued" : { "date-parts" : [ [ "2010" ] ] }, "publisher" : "Cengage Learning", "title" : "ECON Macro", "type" : "book" }, "uris" : [ "/documents/?uuid=1fce4bfb-ceee-4b41-be60-e6d95730a455" ] } ], "mendeley" : { "manualFormatting" : "(McEachern, 2010, p.182)", "previouslyFormattedCitation" : "(McEachern, 2010)" }, "properties" : { "noteIndex" : 0 }, "schema" : "https://github.com/citation-style-language/schema/raw/master/csl-citation.json" }(McEachern, 2010, p.182).
In the 1960s, fiscal policy was again used to further stimulate the expanding economy. Cuts in tax rates were instituted to further boost income rate, consumption and business activity. This period was known as the Golden Age of fiscal policy. By the 1970s, however, new problems started to surface such as increasing inflation and unemployment despite the increasing government spending. Because of this economists began to research on the possible effects of fiscal policy in order to learn when it is most effective to use.
The recession of 2007-2009 has lead to another series of government spending as various financial institutions were bailed out using public funds. To prevent further increase in unemployment and bankruptcy, the government started to give out loans to keep large financial institutions liquid. In 2008, the Senate passed the Troubled Asset Relief Program amounting to $700 billion. Meanwhile, in order to provide livelihood to individuals who lost their jobs, the American Recovery and R...