With the U.S. government prepared to offer a stimulus plan to reverse the negative trend in the economy, we are presented with two different views; one for the stimulus plan and one opposing it. The two views against the stimulus plan are presented by Cochrane and Fama. They both suggest that the proposed plan by the government does not benefit the economy. The belief is that if the government isn’t going to physically print money, then that money has to be taken from one sector of the economy in order to benefit another. This act of borrowing causes less investment or private spending which in turn leads to an increase in unemployment in the affected sectors. Hence, an increase in employment due to the stimulus spending is effectively cancelled out by the loss of jobs caused by the decrease in private spending. Fama refers to the economic equation of private investment equaling the sum of private savings, corporate savings, and government savings. He views the stimulus package in terms of whether or not it increases current future incomes. Both men view the stimulus plan as an increase in government debt. Krugman and DeLong believe Fama & Cochrane failed to consider the “velocity of circulation as an economic variable instead of a technological constant”. They point out that a stimulus plan will cause an increase in the exchange rate and a rise in prices or even cause some other change in a real economic variable that affects trade flows. If the interest rate is fixed, then the GDP will change so that savings equals investment. Since savings plus taxes equals investment plus government spending, an increase in government spending doesn’t reduce investment one for one, but rather increases GDP which results in a higher savings and taxes.It is my belief that both Cochrane and Fama could have strengthened their points by analyzing and listing the history of stimulus plans. They should have mentioned how The Gerald Ford and George Bush administrations tried to increase government spending, but that it had no significant effect on the economy. Similarly, they could have referred to Japan’s lost decade in which the government increased spending during the 1990s in an attempt to reverse the economy, but ended up worsening it. a) (383 Words)The objective of the Harper government’s spending over the next four years is to help stimulate the economy, but at the expense of increasing the deficit. The essence of the plan is to spend on infrastructure, lower taxes, and rescue struggling industries. With respect to spending on infrastructure, the short term gains are that there will be more jobs and through this, spending will increase which will aid the economy. The problem is that this short term boost to the economy is leading to a deficit which means that in the future, there will be cutbacks of some sort that will negatively affect the economy. So in the long term, although there will be improved infrastructure, GDP will decrease in order to decrease the deficit. The next issue lies with the government injecting more money into struggling industries such as the auto industry. It is clear that in the short term it will decrease unemployment, but again, in the long term the deficit created will lead to cutbacks in the future. Furthermore, the domestic auto industry has been struggling for many years due to poor business practices. A cash infusion will only temporarily delay the inevitable, which is that the funds will be used up quickly and the auto industry will return to its current state and lead once again to higher unemployment. A third avenue which the government intends to use as a means to boost the economy is the lowering of taxes. Unfortunately, tax cuts are not likely to benefit the economy. The explanation is as follows: The government is expecting consumers to spend whatever savings result from a decrease in taxes. However, consumers might decide to use the savings to reduce their debts or even buy foreign products rather than domestic ones. This philosophy is validated by the Brookings Institution where they state that permanent tax cuts are “especially counterproductive”. In summary, the increase in government deficit in order to stimulate the economy will have very little to no effect on the Canadian economy in the near future. Since the Canadian economy is directly affected by the American economy, we will only see a turnaround in the economy once our neighbours south of the border see successive positive growth in their GDP; thus, nullifying the need for a stimulus package.