The article “SHIROFF: Overheating economy should not be a concern when passing stimulus bill” by Tailor Shiroff covers the topic of government incentives aimed at leveling the economy in a recession. In such a situation, the state, for example, issues benefits for certain groups of the population to stimulate the aggravate demand and prevent stagnation.
This article provides arguments in favor of adopting a stimulus bill and counterarguments against fears of an “overheated economy.” The author of the article explains that an “overheated economy” occurs when excessive government stimulation of the aggregate demand leads to inflation. In this case, stagflation is observed in the state – stagnation of production against the background of inflation. However, Shiroff (2021) believes that such a scenario is unlikely and provides several arguments supporting his position.
First, the “overheated economy” did not occur even during the Great Recession of 2009. On the contrary, then the state’s $ 900 billion was not enough to compensate for the crisis. The author says that many people have lost their jobs and business during the pandemic and need financial incentives and benefits from the state. Shiroff (2021) believes that it is extremely foolish to worry about the extremely unlikely overheating of the economy in view of this circumstance.
It is difficult to disagree with the author, given that the pandemic paralyzed most sectors of the economy. Noteworthy, this situation has persisted for almost a year, and nobody knows when the lockdown will end. On the one hand, the effect of deferred demand is accumulating, which can boost sales in the future. But this effect will not be dramatic enough to cover the drop in demand from groups of the population who are completely deprived of financial sources in the form of salaries or profits from their businesses. On the contrary, the allocation of financial incentives and benefits for these groups will allow them to take their previous positions and roles in the country’s economic system.
Many coffee shops, restaurants, pizzerias, cinemas, bars, nightclubs, beauty salons, and other businesses were forced to wholly or partially cease their activities after the lockdown was announced. Many people who were previously employed in the service sector lost their jobs and faced severe employment difficulties. Their problems are obvious to society – many have lost the ability to pay their rent and find themselves on the street. Others were forced to take out more and more loans. If the government decides to adopt a stimulus bill, it will help stop the recession.
This chart represents the AD-AS Model or the Model of Aggregate Supply and Aggregate Demand. It demonstrates that a higher level of demand indirectly affects the rise in prices, saving the economy from recession. It should also be borne in mind that the state’s economic incentives should be aimed at reducing the unemployment rate, the main factor determining the growth or fall of the aggregate demand – targeted financial injections will not be enough. In this case, the country’s economy will be able to approach the intermediate zone’s upper border, quickly reach its full-employment GDP and avoid falling into the Keynesian zone.
It is interesting that inflation growth is indeed possible, but only on the condition of financial injections, comparable to the country’s annual budget. In this case, indeed, inflation would be inevitable, especially in the absence of measures aimed at reducing unemployment and restoring the functioning of small and medium-sized businesses, as well as large manufacturing companies. If the state limits itself only to employee benefits and ignores business, the business will suffer and the economy as a whole.
Shiroff, T. (2021). SHIROFF: Overheating the economy should not be a concern when passing the stimulus bill. Daily Targum. Web.