Read the case study below and answer the question(s) that follow. You are required to use Managing Public Finances theory and related law sections in your answer(s)

US Public Finance under Barack Obamas Administration

When Barack Obama was inaugurated as the 44th President of the United States on January 20, 2009, he faced an economic crisis that was the worst that the United States had seen in at least a quarter century. The unemployment rate, which had been at 4.8% less than one year earlier, had risen to 7.6% over 3.6 million jobs were estimated to have been lost since the start of the recession in December 2007. The Dow Jones stock market index had fallen 34.27% since January 22, 2008, and 78.19% from its peak on October 9, 2007. As President Obama said in a meeting with nine Democratic and Republican leaders at the White House three days after taking office, We are experiencing an unprecedented economic crisis that has to be dealt with and dealt with rapidly.

Leaders from both parties agreed on the importance of taking action to deal with the faltering economy, and they looked to pass a stimulus package of some sort. Senate Minority Leader Mitch McConnell called the potential stimulus package a critical piece of legislation and Senator Majority Leader Harry Reid warned that if Congress failed to pass a stimulus package, our entire country will suffer and the world will suffer.

Unfortunately, this consensus ended once the debate began over how to stimulate the economy. Democratic proposals for a stimulus package centered around increased spending, primarily for expanded health benefits for low income families and the uninsured, increased aid to state and local governments, and increased educational spending. A second part of the stimulus (about one third of the total) would come from tax cuts, primarily for middle- and lower class taxpayers. As the Democratic Speaker of the House, Nancy Pelosi, said, [President Obama] said he wanted action, bold and swift, and that is exactly what were doing today.

Republicans disagreed. Rep. Eric Cantor of Virginia, the second-ranking House Republican, called the stimulus bill . . . a spending bill beyond anyones imagination. Republicans argued that the focus in any such bill should be on reducing tax burdens. They proposed lowering the lowest two income tax brackets, introducing a tax credit for small businesses, cutting the corporate tax rate to 25 percent from 35 percent, and removing the taxation of unemployment benefits. The Republican alternative met with strong opposition as well. As the New York Times editorialized, Every dollar spent on a politically expedient tax cut is money that is not spent where it could do more good. It also perpetuates the corrosive debate in which taxes are portrayed as basically evil and tax cuts as unmitigated good. That is not a debate that Mr. Obama should engage.

Given the strong Democratic majority in both houses of Congress and the newly elected Democratic President, it is not surprising that the final stimulus bill corresponded more closely to the Democratic plans. The final bill had a total price tag of $787.2 billion. Of that total, 63.4% was devoted to new spending initiatives, including $26 billion to local school districts, $54 billion in state fiscal relief, $24.7 billion to subsidize the purchase of health insurance by unemployed workers, $19 billion for investments in health care technology, almost $40 billion in new subsidies to low-income and unemployed workers, over $30 billion to transform the nations energy transmission, distribution, and production systems, and over $80 billion to improve the nations roads, bridges, trains, and waterways. The remainder was devoted to tax reductions, mostly from new tax cuts and tax credits for low- and middle-income families. The final bill was popular, favoured by 59% of the public just before its passage, but it still faced a host of critics on its size, including President Obamas election opponent, Sen. John McCain of Arizona, who said, Were laying multitrillion dollars of debt on future generations of Americans. I cant support such a thing.

The controversies over the proper role of the government in dealing with this economic crisis raise the fundamental questions addressed by the branch of economics known as public finance. The goal of public finance is to understand the proper role of the government in the economy. On the expenditures side of public finance, we ask: What kind of services should the government provide, if any? Why should the government be spending billions of dollars on aid to local schools, health insurance for the unemployed, and new electrical grids? More generally, why is the government the primary provider of goods and services such as highways, education, and transfers to the unemployed, while the provision of goods and services such as clothing, entertainment, and property insurance is generally left to the private sector? On the revenue side of public finance, we ask: How much should the government tax its citizens, and how should that amount be related to the economic circumstances of those individuals? What kinds of activities should be taxed or be given tax relief in difficult times? What effect do taxes have on the functioning of the economy?

Source: Dr. Jonathan Gruber (2010), Public Finance and Public Policy - Massachusetts Institute of Technology

Questions

a) Were laying multitrillion dollars of debt on future generations of Americans. I cant support such a thing.Discuss Sen. John McCains view on President Obamas public finance distribution strategy. (50 Marks)

b) Using the case study, evaluate the role of effective management of public finances in avoiding controversies over the proper role of the government in dealing with economic crises such as Covid 19 and the Global Economic Crisis without prejudicing the national development agenda. (50Marks)