No Government No Problems

No Government, No Problems

An economic spending shock is defined as a change in spending that initially affects one or more sectors and ultimately works its way through the entire economy. (Macroeconomics, Principles and Applications, 3rd Edition, Hall and Lieberman) Government is always quick to intervene when it feels the economy is heading into a recession due to a spending shock. Often the government is not needed in the economy because the economy will, in time, work itself out. When it comes to spending shocks affecting the economy the classical position is the correct position because government intervention often instigates recessions instead of stopping them.

In the 1990s to the year 2000 the economy was said to be in an economic boom due to technological advances in the U.S. The internet was developed in the 90's which connected people all across the world simply by the click of a button. This led to billions of dollars being made in a global marketplace where there were no limitations. Consumption of goods increased because there was a larger mass market of consumers waiting to devour the goods and services companies produced. Because these companies were making money, they in turn, invested in more capital to fuel their production of these goods and services which led to a positive spending shock. Things were going great for the U.S. economy until the year 2001 when technological investment started to slow. The influx of technological ideas and ways to make money over the internet began to slow down which led to a draw back in investment spending which led to a negative spending shock. This had to be expected though, just as the luster of a new pair of shoes wears off so would the novelty of the internet. People will always think the grass is greener on the other side and there is always something bigger and better on its way. So if people know this, why do they need government intervention? According to the government, by reducing interest rates and creating tax cuts it will put more money into the hands of the people who in turn will, by spending and investing, put that money right back into the economy which will spur the economy out of recession and more towards a steady expansion. This is a great theory, and as we have seen, nothing but a great theory. What actually ended up happening was since people had been cutting back their spending habits they were in a "penny pinching" state of mind. They wanted to make every last penny go as far as it possibly would. Once the tax cuts were introduced all of a sudden people had a little extra money in their pockets and because of their previous state of mind, instead of spending it, they immediately saved it. This led to hardly any money being put back into the economy