According to Godley & McCarthy, the economic idea that fiscal policy affects GDP has fallen from favor in recent years with the result that there has been a growing emphasis on monetary policy and a decline in using government expenditures to stimulate the economy. Godley & McCarthy, both professors at British universities, suggest that fiscal policy has a direct impact on gross domestic product (GDP) and that the reduction of taxes has an indirect stimulus effect on GDP by providing taxpayers with greater levels of disposable income. This analysis considers the work of the two economists with a particular emphasis on the ramifications for one American company, Boeing.
Godley and McCarthy maintain that an increase in government expenditures increases GDP while a tax reduction indirectly increases GDP (p. 18). Moreover, the authors suggest that the effect (which they call the "fiscal stance") can be determined by dividing government expenditures by the average tax rate. The authors further suggest that they are not the first to suggest this relationship, and point out that Carl Christ at Johns Hopkins postulated similar ideas more than 30 years ago.
What sets Godley and McCarthy's work apart is that they use this initial theory to move into Congressional Budget Office (CBO) predictions about upcoming revenues and expenditures, and suggest eventually that Americans' lack of savings and high dependence on indebtedness puts the nation at an economic disadvantage which needs to be addressed if the nation is to be financially successful in the long-term.
The idea that fiscal policy affects GDP is not new; it was largely responsible for the various New Deal programs enacted during the Great Depression of the 1930s. The projects undertaken during the 1930s, including numerous dams and public infrastructure activities, not only provided immediate employment (and taxes) to individuals who were unemployed, but provided investment in...