How to Grow the Economy Essay

Tags: gross domestic product government spending federal reserve income tax

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Fiscal Policy



A lot of debates exists out there in the economic ether regarding the best economic structure for an economy. Even so, there is a broad amount of consensus that exists regarding what should be done during expansionary economic shifts and what is less than wise. With that in mind, the author of this report shall address a number of questions related to that overall topic including what should be done with taxes, government spending and the general tools of the Federal Reserve Bank including the changing of the reserve ratio requirements, the discount rate and the selling of government securities. There is also the question on what happens with things like aggregate demand, gross domestic product and employment. While predicting the outcome of economic efforts and policy can sometimes be hard to pin down, there are best practices that are generally held to be better than others when economic expansion is the desired outcome.

Analysis



The typical reason for economic expansionary policies is when an economy is emerging out of a recession. A good and recent example of this was the years during and after the Great Recession. Indeed, that massive financial valley started in roughly 2007 and the recession did not "end" until 2009. The economy grow at a consistent yet tepid pace despite very low interest rates that are just now starting to be raised. Even so, what was done in response to the Great Recession ran the gamut of Keynesian investment to lowering interest rates and taxes as a means to prop up the economy or perhaps even jumpstart it. Generally speaking, an economy that wants its people to invest and grow will lower taxes, even if it is on a temporary basis. During the aftermath of the Great Recession, an example of this would be the Social Security tax "holiday" that many enjoyed. There were also tax incentives like the HIRE act that encouraged people to hire workers that were not employed. As far as government spending goes, there is typically an increase with that as well with the focus being on the aforementioned Keynesian spending. Meaning, while there is obviously a focus on supporting situations and problems that are more protracted during recessions like unemployment and welfare, there is also a focus on projects and spending that get the economy "going". The terminology de jour during the aftermath of the Great Recession was "shovel-ready jobs" (Sightings, 2012). There is even talk in more recent days of a massive amount of infrastructure spending to the tune of up to one trillion dollars to improve and replace the aging infrastructure of the United States and remediating problems in cities like Flint where water pipes contain lead and are otherwise decrepit and old. In short, improving economic times through government spending is not something that allows the economy to grow and sustain itself in an organic way but it can be a proverbial Band-Aid to the economy. Indeed, filling the void left by the private sector falling away is seen as a way to help out the economy until it can grow and thrive on its own accord (Bradley, 2017).



When it comes to the Federal Reserve, the widely-hailed tools that they make use of is the required reserve ratio, the discount rate and open market operations. One thing about the required reserve ratio in relation to the Great Recession is that a wide number of banks failed due to the economic travails that came about.

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Indeed, many banks were completely eviscerated while others were held in receivership and were gobbled up by the remaining banks. Beyond that, banks had to under go "stress tests" using revised fraemworks and tests and even the surviving banks were subjected to that. Indeed, one of the factors that would dictate the results of these tests would be how much the bank has in reserve from a ratio standpoint and what it could or should be to help the bank survive economic problems. Recessions like the Great Recession do not happen often. That recession was the worst one since the Great Depression which happened in the 1930's. The latter of those two crises proved, though, that having banks fail on a wide scale can be very damaging to the economy to the point where runs occur on banks and the financial system in general becomes rather unstable. The Great Recession was not nearly as bad as the Great Depression and the banking system weathered the storm. However, the Federal Reserve and the financial regulatory framework that existed in the last generation (but did not exist in the 1930's) is one of the main reasons why (Tarver, 2017).



When taxes are lowered, the general effect is that people and businesses spend more. What in particular they spend their money on matters as it might be something that is fleeting and temporary or it may also be something more enduring and investment-worthy. There is also the question of whether a lot of the people involved will just use the cash infusion to "catch up" on expenses and bills or otherwise sock away money for a rainy day. Regardless, the overall goal of the cash infusion is to get people to spend and consume and investment-type spending is much more desirable over something that is a "one shot" deal. Businesses in particular are eyed and watched when it comes to taxes. Tax cuts are designed to get people to expand and hire. However, some businesses will just store and hold the money to build up their stock of cash. Such behavior is not the goal of the tax cuts, for obvious reasons. Even so, businesses might be hesitant to spend and invest when the economic outlook is less than stellar (Samwick, 2016).



Regardless, more spending typically means more demand and that is often the entire reason why the tax cuts are done in the first place. Government spending is seen as another way, albeit inferior, to do the same thing. After all, the building of roads and bridges incurs demand but that money is typically coming from taxpayers and finding the necessary funds without incurring debt or raising taxes can be a challenge. This is precisely Keynesian spending is often criticized in comparison to private sector endeavors. Even so, increasing demand in any way is typically a good thing. The more spending there is, the higher the gross domestic product (GDP) typically is and the same is typically seen with employment. More spending at stores due to tax refunds or….....

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References

Bradley, R. (2017). Everything You Need to Know About Donald Trump's $1 Trillion Infrastructure Plan. Fortune.com. Retrieved 1 February 2017, from http://fortune.com/2016/12/21/donald-trump-public-infrastructure-building/

Investopedia,. (2017). Expansionary Policy. Investopedia. Retrieved 1 February 2017, from http://www.investopedia.com/terms/e/expansionary_policy.asp

Jarhan, S. (2014). What Is Keynesian Economics? - Back to Basics - Finance & Development, September 2014. imf.org. Retrieved 1 February 2017, from http://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm

Liesman, S. (2017). Here is the No. 1 threat to US economic growth, CNBC Fed Survey respondents say. CNBC. Retrieved 1 February 2017, from http://www.cnbc.com/2017/01/30/trumps-protectionism-biggest-threat-to-us-economys-growth-cnbc-fed-survey-respondents-say.html

Miroff, N. (2017). How to fight hyperinflation in Venezuela? By seizing massive amounts of cash. Washington Post. Retrieved 1 February 2017, from https://www.washingtonpost.com/news/worldviews/wp/2016/12/13/how-to-fight-hyperinflation-in-venezuela-by-seizing-massive-amounts-of-cash/?utm_term=.fd04abf65858

Ohanian, L. (2011). Accounting for the Great Recession | Federal Reserve Bank of Minneapolis. Minneapolisfed.org. Retrieved 1 February 2017, from https://www.minneapolisfed.org/research/economic-policy-papers/accounting-for-the-great-recession

Samwick, A. (2016). Effects of Income Tax Changes on Economic Growth | Brookings Institution. Brookings. Retrieved 1 February 2017, from https://www.brookings.edu/research/effects-of-income-tax-changes-on-economic-growth/

Sightings, T. (2012). How Would Keynes Save Our Economy?. US News & World Report. Retrieved 1 February 2017, from http://money.usnews.com/money/blogs/on-retirement/2012/07/17/how-would-keynes-save-our-economy

Tarver, E. (2017). What happens if the Federal Reserve lowers the reserve ratio?. Investopedia. Retrieved 1 February 2017, from http://www.investopedia.com/ask/answers/071415/what-happens-if-federal-reserve-lowers-reserve-ratio.asp

Young, J. (2013). Does America's Shrinking Private Sector Signal Capitalism's Unmaking?. Forbes.com. Retrieved 1 February 2017, from http://www.forbes.com/sites/realspin/2013/09/11/does-americas-shrinking-private-sector-signal-capitalisms-unmaking/#4fa140a96350

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