“U.S. Senate Democrats agree to $3.5 trln for budget reconciliation bill” and “Spain to Invest $5.1 Billion From Its Share of EU Pandemic Fund to Boost EV Industry”: Article Review.
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A newly voted democratic government might be able to achieve a significant part of the funds for the investments in the infrastructures. Senate Democrats managed to strike a deal for the inclusion of $3.5 trillion in the upcoming budget reconciliation (Cornwell and Cowan). This sum, coupled with the inclusion of $600 billion in a bipartisan infrastructure bill, results in $4.1 trillion, which according to Senate Majority Leader Chuck Schumer, is very close to the sum requested by President Biden (Cornwell and Cowan).
It is expected that the money will go towards Biden’s requested $6 trillion plan, which includes investments in infrastructure, education, and health care. At the same time, while $3.5 trillion investment directions will be a subject for debate, $600 billion would be spent on the reconstruction of traditional infrastructure such as roads and bridges combined with the expansion of internet coverage in rural areas.
The Spanish government wants to make large investments in electric vehicles. The government plans to use €4.3 billion to support the cause from the European pandemic recovery funds (“Spain to Invest $5.1 Billion”). The primary goal is to revitalize the local automobile industry and drive manufacturers towards the production of electric vehicles. The left-wing political party of Spain is willing to support every segment of the production chain, starting from lithium extraction and electric battery assembly (“Spain to Invest $5.1 Billion”). Moreover, private investors also seemed interested in the project as approximately €19 billion were directed towards the same area (“Spain to Invest $5.1 Billion”). The plan is expected to bring in a larger number of new workplaces to facilitate the pool of 2 million workers and increase the GDP from the industry to 15% by the end of 2030 (“Spain to Invest $5.1 Billion”). The plan is set to be approved by the Spanish cabinet on Tuesday.
The government spending of the US on healthcare, infrastructure, and education would directly benefit major social and construction companies related to the respective fields. The increased government spending would have a multiplier effect as companies will need to acquire more resources for their products. Assuming that the US GDP multiplier is 1.4, it is possible to calculate that the total output of the proposed initial spending would be equal to 5.74 trillion dollars. A similar effect but with lower scope can be seen in the case of Spain, where the government spending of 5.1 billion dollars of manufacturing of electric vehicles would benefit interrelated companies. On the estimation that Spain’s GDP multiplier is the same as in the case of the US, total spending would amount to 7.14 billion dollars.
The baseline of these two articles from an economic view is the fact that there is an expected increase of $4.1 trillion dollars in the US and 5.1 billion dollars in Spain’s governmental expenditure. Fiscal policy often refers to the increase in government spending, which applies to the two cases and will cause a shift of the aggregated demand (AD) curve to the right, which is seen in Picture 1. From this, it is possible to infer that the price level would increase together with GDP. Given that both countries are at equilibrium with long and short-run aggregate supply (LRAS and SRAS) and AD. Increasing governmental spending has a chance to result in an inflationary gap, which can be observed in Picture 2.
The increase in aggregate expenditure (AE) and rise of national income, which can be seen in Picture 3, might be inevitable with the two countries’ increase in spending. In addition, the increase in spending on infrastructure and healthcare in the USA may lead to the crowding-out phenomenon. This phenomenon may emerge due to the higher interest rates incurred by the increased expenditures of the states. This may slow investments, diminish consumption, and have a reduction effect on net export.
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Ultimately, it means that the US economy would not expand by 5.74 trillion dollars but a lesser sum. However, the crowding effect is not foreseeable for Spain because government involvement in the electric vehicles sector aims at complete market expansion at every stage of development. In other words, there would not be a substantial effect on the supply or demand side of the market. This point is the greatest difference between the fiscal policies of these countries.
Nonetheless, the result of the crowding effect on the US would be a lower shift in AD in comparison to the initial assumption, which we can see in Picture 4. Picture 4 depicts that the economy does not reach its potential GDP, and an increase in the US expenditure would not lead towards LRAS due to the crowding-out effect. Thus, there could be several effects from the increase in governmental expenditures. The first effect is the growth of price level and real GDP.
The second effect refers to the rise in the inflationary gap or its appearance, in the case when the market is in equilibrium or exceeds it. At the same time, it may slow a decrease in the rate of inflation on the occasion that the market is below the equilibrium. Moreover, growth of AE and national income occurs from the influence of increased government spending, but it is shortly mitigated by the crowding-out phenomenon. Although, the later effect is not constant and suggests that rising public sector spending limits private sector spending.
The investments by Spain are planned to be evenly distributed and do not overpower the private investments in the same sector. The investments of the Spanish government could be an example of expansionary fiscal policy as they aim to expand the economy and create new jobs. On the other hand, in the case of the US, the emergence of additional economic activity is an externality of spending.
Due to the coronavirus, the US economy is not at its full potential. This governmental spending could help the national economy and revitalize it. As the US economy is below its potential GDP, national spending could improve the situation to a certain extent. In addition, the spending might increase the employment rates through the expected job growth. Nevertheless, the spending is not an attempt to restore the national economic conditions; thus, it is difficult to describe it as the fiscal policy and directly attribute the improvement of the job market as its effect. There could be an increase in the price of goods and services, but it would not drastically change the quality of life among the local population. In contrast, the case of the Spanish government aims to improve the situation within the job market and expand its economy, making it a fiscal policy.
However, a lower scale of investments does not suggest a drastic change to its economy. Nevertheless, the emergence of the new market in the face of electric vehicle manufacturing is a good move towards the sustainable future of the country.
Cornwell, Susan, and Richard Cowan. “U.S. Senate Democrats Agree to $3.5 Trln for Budget Reconciliation Bill.” Reuters, Thomson Reuters, 2021. Web.