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Implementation of Fiscal Policies in the US

Info: 2286 words (9 pages) Essay
Published: 23rd Mar 2021 in Finance

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When monitoring the state of the economy, the Federal Reserve will mainly use the system of expansionary monetary policy when our nation begins moving into the direction of a recession.  They begin by reducing the federal funds rate which decreases the total interest rates and encourages corporations and businesses to buy equipment, hire more workers and borrow more money.  For the consumer, lower interest rates motivate individuals to spend more money in general and encourages the purchase of larger items like, automobiles and recreational vehicles.  With lower interest rates we also see an improvement in the housing market as well.

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Immediately after the 911 attacks and to reduce wide-spread financial panic, the Federal Reserve made several timely calculations that softened the effect of terrorism on the US.  They immediately announced, “The Federal Reserve System is open and operating. The discount window is available to meet liquidity needs” (Makinen, 2002, p.15).  Additional actions by the Fed included, pumping $100 billion/day into the financial system, negotiating with three major foreign Banks to exchange dollars for foreign currency adding an additional $90 billion, they lowered key federal fund rates at the New York Stock Exchange, and lowered rates three additional times over the next quarter (Makinen, 2002, p.16). This 911 snapshot is just one example of the use of monetary policy.

Another system the Government will use to combat recession and reduce unemployment is by implementing what is known as fiscal policy.  Through the use of fiscal policy, the government will generate more jobs by expanding government spending and lowering taxes.  “Lower taxes increase disposable income and therefore help to increase consumption, leading to higher aggregate demand (AD)” (Pettinger, 2019). 

The Bush tax cuts of 2001 and 2003, are examples of the government lowering taxes to create more disposable income for consumers.   “The Bush administration designed the tax cuts to stimulate the economy and end the 2001 recession” (Amadeo, 2019).  This plan also increased the child tax credit that could be claimed from $500 to $1,000 as well as providing several other tax relief or tax reduction benefits (Amadeo, 2019). The 2009 Economic Stimulus Program is an example of the government creating jobs by increasing Government spending on projects.  The Stimulus Program included plans to improve affordable health care, give tax relief, increase educational opportunities, and improve our nation’s energy independence, to name a few (Wikipedia, 2020).  Both fiscal and monetary policy strategies seem to have their pros and cons but striking some type of balance between the two methods should bring about a healthy balance for the economy.

 When the government uses fiscal policy to combat recession, the lowering of taxes creates more disposable income for the consumer and for businesses as well.  This coupled with increases in government spending on programs and projects encourages companies to produce more.  Once companies produce more and consumers have additional disposable income, there begins to be an increase in need for more workers to produce added product and services.  John Keynes was an famous economist who believed in using fiscal policy during a “prolonged” recession (Pettinger, 2019).  “He argues that in a recession, resources (both capital and labour) are idle.  Therefore, the government should intervene and create additional demand to reduce unemployment” (Pettinger, 2019).  Some cons to using this approach requires higher government debt due to borrowing, which for some countries can be problematic if they are already operating with high levels of national debt.  Another con to this fiscal approach is that consumers may choose to save the money from the increase in disposable income, instead of spending.  Inflation is another negative side effect. 

Individuals leaving jobs for one reason or another to find another job, new graduates, and those who are re-entering the workforce after an absence, is known as frictional unemployment.  Frictional unemployment can actually be healthy for the economy as it allows individuals to leave one job for a better job that is a better match for them.  This is beneficial to both the individual and the employer in finding the right person for the job.  Frictional unemployment is constantly occurring in the economy and there is not much that the government can do.  Frictional unemployment is the least important factor in determining the health of the economy.

Structural unemployment is when individuals remain unemployed for long period of time because there is a disparity between their skill level and the technicality of the job, or there are workers available within a certain geographical area, but no jobs available.  Policies that would reduce unemployment could include education and training for employees to help them increase their skill level to be able to compete for jobs.  Another idea is stricter unemployment benefits which would encourage unemployed workers to accept a job or risk losing unemployment benefits.  Capping the length of time one can claim unemployment and/or implementing a lifetime cap an individual can collect unemployment benefits is also a strategy.  Critics of this method will argue the reverse.  By extending additional benefits to the unemployed, they will in turn continue to use their purchasing power to support demand, which will positively effect supply and production.

An example of implementing stricter unemployment benefits is a new law that passed in the state of Arizona, which has the second lowest unemployment benefits in the US.  Under the new law, which took effect in August 2018, after four weeks of collecting unemployment an individual “would have to take any job where the employer is offering to pay at least 20 percent more than they are collecting in benefits” (Howard Fischer Capitol Media Services, 2018, p. 1).  Arizona law limits weekly unemployment checks to $240.00 no matter what the individual was earning previously.  “That means someone would have to take any work that pays at least $288 a week, the equivalent of about $15,000 a year, no matter how much she or he was earning before” (Howard Fischer Capitol Media Services, 2018, p. 2).

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Extending tax breaks and incentives to companies who keep their business and employment within the US or set up businesses in depressed locations nationally, creating new jobs and revitalizing the area, is another way to combat recession.  President Trump’s tax reform law fashioned a new program called the Opportunity Zone program, which is intended to give tax incentives to those who invest in depressed areas. “Investors who have capital gains can roll that money into an Opportunity Fund, which will then invest in local businesses or projects such as multi-family housing developments that are an approved Opportunity Zone” (Fossyl, 2018).  Georgia Governor Nathan Deal said concerning the Opportunity Zone Program, “By attracting more private investment to underserved areas, the tax incentives for Qualified Opportunity Zones will further encourage businesses to invest in the communities that need it most, while also creating meaningful employment opportunities across the state” (Fossyl, 2018).

“Government incentives” was one of the top reasons several US manufacturing companies have decided to keep or expand their US manufacturing operations here in the US (Comen, 2018, p. 3). Among the top manufacturing companies committing to increase investments and jobs in the US economy is Apple, General Motors, Boeing, Ford and Intel.  The combined total of new jobs for American workers is over 52,000 from these five companies alone (Comen, 2018, pp. 1–3).  The impact Intel will have on the creation of jobs over the next few years in the State of Arizona, is over 10,000 projected, high-wage positions (Comen, 2018, p. 2).  

In 2001, the 911 terrorist attack on the US brought about an enormous shake-up for the US economy and unemployment.  The effects were felt globally.  The US labor market suffered the effects immediately with mass layoffs.  Companies had already announced their intention to layoff over one million employees due to the recession that began in March 2001 (Makinen, 2002, p. 53).  This coupled with the 911 terrorist attacks lead to an unprecedented number of layoffs.  “The air transportation industry laid off 38% of these employees, and the accommodations (hotel and motel) industry, 23%” (Makinen, 2002, pp. 53-54).   Five states, California, Nevada, Illinois, New York and Texas were the hardest hit with 33 states claiming layoffs as a result of 911.  During this time period, it became increasing difficult for individuals to get a job (Makinen, 2002, p. 54). Both frictional and structural unemployment were affected.  Those skilled workers laid off had a difficult time gaining employment elsewhere, as companies nationally were downsizing operations, and those individuals who had been unemployed for long periods of time had less opportunities available for work with less disposable income to gain the skills needed.

Other major events that have affected unemployment is the 2005 hurricanes, Katrina and Rita. “Excluding people whose work was disrupted only for a few days, the combined direct effect of Hurricanes Katrina and Rita on employment was probably the loss of between 293,000 and 480,000 jobs” (Holtz-Eakin, 2005). With Katrina nearly destroying New Orleans by severe flooding and Rita crippling communities in Texas and Louisiana, jobs were lost that would never be recovered and individuals and families displaced for long periods of time or permanently.  “The labor force in the coastline counties of Louisiana and Mississippi changed considerably during the 2005 hurricane season” (Coughlin, 2012, p. 14).  “The high unemployment rates in Louisiana and Mississippi statewide—but especially in their coastline counties—exhibited in September 2005 are well above the rates of the previous year” (Couglin, 2012, p. 14).  These two natural disasters affected all types of unemployment.  Skilled workers had no place to work or live.  Individuals who had been unemployed now faced more hardships in relocating out of disaster areas.  Temporary reconstruction and rebuilding jobs may have been created, however the overall job loss was staggering. 

 Governments are often concerning themselves with the effects of inflation and recession, but equally as important is the matter of unemployment in our nation.  Individuals and businesses need to feel confident in their future.  They need to feel that things will get better.  With this hope and confidence comes trust, which leads to investment, savings and education to improve skills for a better tomorrow.  These factors are keys to success in economic recovery and balance, especially after unforeseen disasters take place. 

 

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