Increase Government Spending to Fight Recessions
Introduction
Government spending as a recession recovery tool has been the subject of debate numerous times. To date, there is no definitive proof of its success or failure of its application. An active fiscal or a monetary policy is the sum total of the actions taken as a reaction to the current economic conditions; the government chooses to use a specific policy to deal with something in the economy (Mankiw, 2001).
Government spending as a method for lessening recession is a tool that has been proposed and even applied by many governments when they are experiencing a recession. This tool proposes the injection of more funds into the economy by the government (Riedl, 2010). This implies the liquidation of government assists and that the government should buy back its Treasury bills and bonds to increase the amount of money in circulation. This theory was initiated by Keynesians stating that government injections can be used to compensate for the lack of private demand (Riedl, 2010). They believe that the government spending increases the money in circulation, taxes reduce the amount of money in circulation. This difference constitutes the budget deficit. This mode proposes that the government should provide more jobs to cater for unemployment, which in turn would increase the amount of disposable income while at the same tie improving the lives of its people. This is different from the government buying back its Treasury bills and bonds and it’s far more beneficial. As such, we can conclude that government injections are beneficial to the investors if the government chooses to liquidate its assets and it’s beneficial to private individuals because it increases their disposable income and at the same time allows them to afford basic commodities (Riedl, 2010).
Proponents of this model argue that government injections in a recession increase the funds in the banking sector, which in turn are borrowed by investors thus boosting the economy out of the recession. The funds are used as capital by the investors, thus increasing the revenue and eventually stabilizing the economy. Keynesians argue that there is no guarantee of the economy bouncing back owing to the fact that at any given point the investment rate will be equal to the savings thus there is a need for government intervention to cater for the maintaining a stable economy.
Critiques of this tool state that the economy has its built-in tools to survive a recession. Any economy is likely to grow out of the recession provided that there are no negative interference from the government or other external factors (Riedl, 2010).
They also argue that the funds are first taxed or removed from the current economy. Therefore, it is a cyclic distribution of money that does not in any way benefit the economy instead it is a redistribution of money from one group of people to another.
According to this model, the main aim is to convert savings into capital, however, it can be argued that the financial system performs the same function thus the model is not applicable in this situation.
Fiscal and Active Monetary Policy
The Monetary and Fiscal policies are used by the government and the Federal Reserve respectively to regulate and influence the economy (Forsythe, 2012). These policies can be used to either stimulate or slow down the economy, however, it is hard to determine which one is more effective in the long run and the short term. The monetary policy incorporates performing open business sector operations, modifying the store necessities and adjusting the government reserve interest rate. The fiscal policy regulates the economy by affecting the taxation system and the government spending. An active fiscal or a monetary policy are the actions taken as a reaction to the current economic conditions; the government chooses to use a specific policy to deal with something in the economy (Mankiw, 2001).
There are a few advantages to this type policy. In the first place, it allows quick and immediate response to emerging economic situations. It gives the policy makers complete control over the macroeconomic situation which allows them to formulate the most reasonable contingencies to cater for the current situation (Forsythe, 2012). It gives the economically apt policymaker control over the economy, which allows them to manage and maintain the economic fluctuations to a minimum. This allows the proper management of the economy compounded with a balance between the investments, expenditure as well as the budget expenditure, thus preventing an economic collapse or debt default as that experienced by the Eurozone (Weil, 2008). The active policy allows the policy makers to make adjustments to either the monetary or fiscal policy while maintaining the expectations of both the public and the policy makers. This is achieved through advertising policy changes, but not implementing them; the policy makers then proceed to make the changes that will benefit the public while at the same time maintaining a stable economy.
The active policy is dependent upon the goodwill, economic knowledge and the weaknesses of the policy makers. Since it is a reaction to the present economic conditions, it also depends on the economic stands of the policy makers of the current government. As such, they may favor policies designed to grow the economy in the short run to coincide with election years to facilitate their political ambitions and disregard the long run effects of the policies. In the same light, the Federal Reserve officials may implement policies that will derail the economy to discredit the current policy makers. Active monetary or fiscal policy leaves the economy to human error or the whims of political and Federal Reserve officials (Forsythe, 2012).
Conclusion
In conclusion, the best way to increment monetary development is by expanding efficiency and expanding profitability and work supply in the economy. Historically, governments have been unsuccessful in using the injections to revive their economies. As such this model is not successful in the elimination of a recession. This is because it requires the injection of funds from either increased taxation or increased public debt. An increase in the public debt results in an increase in the interest rates which results in the crowding out of private investments. Higher taxes also result in the reduction of the private individual’s disposable income which will lead to the economy falling further into recession. This also results in increased public debt, which in the long run will result in either higher taxes or a very high rate of inflation caused by the weakening of the currency.
There is great risk involved in leaving the control of the economy in the hand of a few people. It is human nature justifies the corruption by the amount of power this offers (Weil, 2008). A good example is a situation in Greece, where the politicians were unwilling to accept any economic policies that would be contrary to the policies they had made during the election. As such the active policy should be applied with moderation and with safeguards against using the policy for personal or political gain.
References
David N. Wei. (2008). "Fiscal Policy." The Concise Encyclopedia of Economics. Library of Economics and Liberty. Retrieved May 29, 2016 from the World Wide Web: http://www.econlib.org/library/Enc/FiscalPolicy.html
Forsythe, A. (2012). Fiscal Policy: The Concise Encyclopedia of Economics | Library of Economics and Liberty. Econlib.org. Retrieved 29 May 2016, from http://www.econlib.org/library/Enc/FiscalPolicy.html
Mankiw, N. (2001). Brief principles of macroeconomics. Fort Worth: Harcourt College.
Riedl, B. (2010). Why Government Spending Does Not Stimulate Economic Growth: Answering the Critics. The Heritage Foundation. Retrieved 29 May 2016, from http://www.heritage.org/research/reports/2010/01/why-government-spending-does-not-stimulate-economic-growth-answering-the-critics
