There are two primary ways government creates macroeconomic policy, through fiscal policy and through monetary policy. Monetary policy, controlling the supply of money and interest rates, is the domain of the Federal Reserve, which is at least theoretically above politics, since appointments to the Federal Reserve do not run in parallel to presidential administrations. Therefore, it is more fiscal policy influenced by politics that has a macroeconomic effect, through spending and taxation.
Government spending comprises a significant portion of our Gross Domestic Product (GDP), which is the total sum of government, consumer, and investment expenditure. The GDP is a measure of the macroeconomic health of the economy. We look to it to ascertain whether the economy is shrinking or growing. When government spending increases, it has a multiplier effect, causing the economy to grow at a rate greater than just the expenditure would indicate, since when money is spent, it provides income for others, and they spend more. This multiplier effect is significant. But when government spending decreases, it shrinks the economy, also in a "multiplier" way. When the government spends less, that is less money in the pockets of others, so many other streams of income dry up.
Whether government should spend more or should spend less has become a political issue in the United States. Fiscal conservatives believe that when government spends less, it is good for the economy, and fiscal liberals believe that when government spends more, it is good for the economy. The fiscally conservative position is premised on the idea that if government spends less, taxes will be lower, and this will allow businesses to invest more money and expand. This is known as the trickle down theory. Liberals disagree and point out that historically, trickle down economics has never brought about these results, and they rely upon the multiplier effect to argue that government spending does work, pointing, for example, to the various programs of public expenditure during the Great Depression. In both instances, political leaders and candidates are relying on economic theories to make their case although far more mainstream economists are on the liberal side of this debate, for example, Paul Krugman and Robert Reich.
Government effectuates economic policy through taxation as well. It can tax heavily or lightly and pick and choose the kinds of taxes or tax breaks that will be put into effect, as well as what groups or individuals will be subject to taxes or be afforded tax breaks. These taxes and tax breaks have profound macroeconomic effects. An excise tax on imported goods can be put into place to protect American-made goods. A high corporate tax discourages corporations from making the United States their home base. A tax break on mortgage interest encourages more people to become homeowners, which has a powerful effect upon the economy, since more people buying homes means more homes needing to be built, again, that multiplier effect.
Tax policy has also become a politicized area. Those on the right believe that we should give corporations more tax breaks, for example, while not giving so many tax breaks to individuals. The inheritance tax is another area in which those on the right seek to provide tax breaks to wealthy individuals who inherit large estates. The argument is that the less is taxed, the more money corporations and wealthy individuals will have to invest in the economy. Liberals favor higher taxes for corporations and the wealthy and reduced taxes for the poor and middle class. They argue that the right's tax policy ideas have not worked historically and that individuals are paying more than their fair share of the expense of government, since without the loopholes available to corporations and to the wealthy, they often pay at a higher rate than either of those. Furthermore, it is government that pays for the infrastructure that allows businesses to thrive, for example, roads, trains, airports, sewage, and water, as well as police and fire protection. Businesses use all of these provisions of government and could not exist without them, so the argument is that they should have to pay their fare share for all of this.
It would be much better if government spending and taxation policy were based upon evidence, rather than on ideological belief and self-serving ideas, but that is the state of government policy in the United States today. Every voter should understand this, so each person can evaluate these political and economic positions and vote accordingly.
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