Does the economy structure and direct itself or does the government have to step in and regulate it? Economists and policymakers have discussed this issue since the foundation of countries. This paper aims at describing the crucial factors for sustaining an expanding and thriving economy and, more importantly, reasoning why government intervention is a necessity for continuous evolvement. The United States, being one of the most developed nations in the world, will be used as an example due to their highly differing, depending on time, approaches to economical adjustments.
Initially, the USA represented the laissez-faire policy that made the market free of any type of intervention that would stop businesses from growing and expanding. However, this idea failed with the Great Depression and afterwards, the Keynesian economics developed, being the complete opposite. Nowadays, the policy of the country stands somewhere in the middle. The government imposes some regulations but lets the market be free whenever possible.
There exist two main ways the ministers can control the state of the economy – monetary and fiscal policy. Monetary policy is the overview and adjustment of the supply of circulating money (Gust, Johannsen, & Lopez-Salido, 2015). Too much money causes severe inflations or devaluation of the national currency. The branch of government regulating the quantity of print and coin is the Federal Reserve that manages the economy by interest rates, open-market operations, and reserve requirements. An example of monetary policy took place in the USA during the Great Recession. As house prices dropped severely, the Federal Reserve cut the rate of discount from 5.25% all the way to 0% in a year (Investopedia, 2015). Nevertheless, the economy remained weak but this action had motivated purchases of government securities for a total of $3.7 trillion (Investopedia, 2015). For instance, if the rate of interest has already been lowered, there is no room to decrease discount rates. In this case, the FED starts to purchase securities from the government (Gust et al., 2015). This influence induces the economy by reducing the number of bonds and, therefore, increasing the money quantity in circulation.
In fact, the institution has a clear set of goals that it strives to. One of the Fed’s major targets is keeping the financial system stable. After all, society has accustomed to a fluently running financial system that permits the performance of money operations and transactions without any worries (FOMC, 2015). Inflation, the second problem the Reserve has to battle, is the robber that takes away the purchasing power of money. Everyone heard stories of how cheap goods were in the past: gasoline for 10 cents a gallon, stamps sold for a penny, and houses costing no more than $15,000. When inflation is high, people get less revenue from their investments. The Federal Reserve consistently tracks prices so it can step in and take care of high inflation level whenever it becomes a threat (FOMC, 2015). Full employment is also crucial for the organization and the nation overall. The FED understands that time with no unemployment is impossible but it tries to provide and accommodate an environment where ones looking for a working opportunity can simply find it (Gust et al., 2015). In fact, it is in its entirety a system that keeps the United States stable – its economic growth, interest rates, currency – all of that is guaranteed and provided by the Federal Reserve.
As an institution that sustains the economy, what does the FED say about its current state? According to the recent meeting of the Board, the USA today is in a period of expansion that has been continuously stimulated since 2008 (Appelbaum, 2015). To achieve economic growth, the FED has kept its interest rate at values close to zero (Gust et al., 2015) However, in the recent months, Janet Yellen suggested growing more worried about waiting for too long (Appelbaum, 2015). Economic growth has already gone out of the rough period, employment expands by an average of 208,000 jobs monthly, and the unemployment rate dropped to 3% (Appelbaum, 2015). Statements of July, 2015 described progress on multiple ends with little corners as business investment or small inflation (Appelbaum, 2015). Nevertheless, the economy has almost reached a peak with the Board’s Chair stating, “If the economy evolves as we expect, economic conditions likely would make it appropriate to raise the federal funds target” (Appelbaum, 2015).
Fiscal policy does not affect the money supply by actually creating new banknotes but it regulates the economy by changing the methods of circulating money. The most important tool of fiscal policy is taxation. Taxes exist to ensure a certain quality of life, provide healthcare, build roads, and create government-paid jobs that are required in a civilized society (Vietor & Weinzierl, 2012). Some may argue that this purposefully contracts the American economy; however, the money received from taxation is then invested in developing the country and maintaining a high level of cultural and social life. Taxes are also used to either stimulate or slow down inflation by cuts and hikes, thus leaving more money in the hands of consumers or discouraging (Vietor & Weinzierl, 2012). A classic example of fiscal policy usage was Barack Obama’s struggle to get out of the crisis of 2008. After many people had lost their jobs, the government had to intervene in order to deal with the recession. Obama and Biden provided a tax credit to small businesses creating jobs in the USA. The existing organizations received 1000$ of tax credit for each hired employee (IRS, 2014). Furthermore, the President implemented zero taxes for small business investments making it profitable to develop new firms and, therefore, renewing the economy. However, what is the reason for working with the economic state and not leaving it to the FED? The answer is simple – support from and satisfaction of the citizens. People’s esteem motivates the politicians to act. Some may argue that this measure was taken in order to create separation of powers and limit the Reserve.