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GDP and the Business Cycle

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Fiscal policies are guided by economic facts and by measures like the GDP: As we've seen already, the GDP's inadequacies can cause lawmakers concerned only with increasing the GDP to increase externalities such as injured workers, ecological damage, and health costs as a byproduct, and not reap the consequences or even be aware of them. But what about fiscal policy and unemployment? The jury is out as to whether reducing or increasing taxes, reducing or increasing spending, etc. is better for production and employment. A major Heritage Foundation study that “ a large and growing government is not conducive to better economic performance.

Indeed, reducing the size of government would lead to higher incomes and improve America's competitiveness” (Mitchell, 2005). Mitchell cites a Rahn curve, which says that there's a curve in tax revenue between 0 and 100%. The theory is simple: If you tax 100% of income, no one produces anything; but if you tax 0%, the government collapses. There's some optimal middle ground. The problem is that Mitchell is trying to say that smaller government is always but the curve shows that that's simply false: There is a point where cutting government hurts the economy and reduces employment and production.

Meanwhile, Chomsky and Herman, along with progressive economists like Dean Baker, would find this claim absurd. They'd point out that, in general, unregulated free markets are catastrophes (Chomsky, 2002; Herman, 2002). Growth in the neo-liberal period, a period characterized not least by the shrinking of the state, has declined even for the richest countries, and for many poor countries, their economies are actually declining (Herman, 2002).

competitive part of the US economy received an extensive public subsidy (Chomsky, 2002). And certainly, people like Mitchell don't propose cutting the Pentagon system, which makes it a joke in bad taste to say that they are interested in cutting budgets. But clearly, too much state intervention can be harmful, and even efforts to improve a lot of workers or improve growth can backfire: Indeed, the GDP's association with ecological harm indicates that much.

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