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The Effects of Monetary and Fiscal Policy in USA Essay

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Updated: Oct 10th, 2018

The great recession that began in 2006 following the crumple of Lehman brothers, left the central bankers and superior economies in dilemma. The U.S government aggressively invented ways of curbing the devastating upshots of the depression. Among such outcomes were the disintegrations of the main financial marketplaces. Therefore, the government enacted numerous policies to curtail the vast recession (Yang 4).

Sources indicate that, the policies would positively aid in diminishing the outcomes of recession. However, these guidelines would present some negative consequences to the state’s economy. This paper thus identifies the main policies enacted during that time, and explains the negative consequences emanating from such actions. A thorough examination on duty rates, in addition to “crowding out” is vital in realizing the outcomes (Dennis 2).

In February 2009, legislators enacted “The American recovery and reinvestment act (ARRA) of 2009” aimed at fighting the weaknesses in the country’s economy. The act reinforced numerous roles such as provision of finances to its states. The act aided in funding the edification and the transportation divisions. According to Dennis (2), the act funded projects and assisted the poor individuals in the society.

Apart from the above functions, the act highly helped relief taxes imposed on commodities thus benefiting the business people and the consumers. However, the act led to numerous negative challenges. Sources indicate that, the act would have harmful effects on the economy and especially on micro economy. Dennis anticipates a reduction in the total output as estimated by “Congressional Budget Board” (CBO) (Dennis 2).

The short-term economic stimulus proposed by different entities would finally augment the total government debt. This would be due of the amplified in government outlay or returns reduction. Furthermore, during the recession session, individuals hold their wealth in a way not helpful in funding for private investment.

It is probable that the increased debt would drastically lessen the amount of “productive private capital” (Dennis 2). Finally, the study suggests the “crowding out” of debt on the private ventures. According to CBO, each dollar for the arrears would “crowd out” to about a third of the total value of domestic capital (Dennis 2).

Nevertheless, the CBO lacks the exact figures on the level of crowding out likely to occur in future. Therefore, while making the budget approximation, the CBO decides to incorporate both high and low levels of the crowding out. Additionally, the CBO anticipated amplification in employment opportunities but a decline in wages.

The core reason behind the decline would be the inflated reduction in the GDP (Dennis 3). Furthermore, the ARRA would augment interest charges as the Federal Reserve tries to combat inflation. Although ARRA strives to counter the recession by combating the inflation levels, there exists a high possibility of its recurrence in future due to large amount of funds injected into the economy.

In 2008, the U.S government endorsed “The Emergency Economic Stabilization Act” (Straus 4). This policy permitted the treasury department to provide more capital to the banks through procuring equities and mortgages from the distressed companies.

It did not only accord the treasury the authority to provide the funds but also granted it additional powers. Even though the act played a striking part in reducing the effects of recession, it resulted to a number of limitations. These effects highly affected the executives of financial institutions selling the troubled possessions (Straus 6).

The main types of limitations presented by the treasury were on home compensation usually rewarded by fiscal foundations selling the assets. Sources indicate that, direct buying of the troubled assets held by the organization took course instead of utilizing the bidding processes thus forcing the organization to satisfy certain compensation standards. Such standards fail to work in case of purchasing the assets through auctioning.

The second limitation would arise from application of auction in purchasing the assets (Straus 7). The direct purchase also advocated for some limitations when compensating the executive officers. This would result to adverse effects to the financial institutions run by these bureaucrats.

Furthermore, the act highly governed the process of parachute payments, compensation payments, thus an inflated tendency of recording losses that would result to slow growth of these institutions. In addition, the act prohibited any compensations provision to the employees’ wages (Straus 8). This to an extent would pose numerous challenges thus shortage of security for the cash.

The “The Economic Stimulus Act (2008)” is a congress act enacted in 2008, a time when the effects of recession were at the peak (Yang 4). The congress realized the need to boost the American economy thus its implementation. It permitted the eligible taxpayers and married couples obtain high ratio of discount on the taxes.

In addition, other individuals who never paid dues but earned $ 3,000 and above qualified for these remunerations. It also benefited specific businesses through tax reduction. Despite the taxes reduction, the resultant effects of the policy would be devastating to the U.S citizens residing in native countries.

A current study conducted by professionals indicates challenges for both professionals and immigrants residing out of U.S due to the taxation system (Yang 6). The act demands for imbursement of duties even if one is out of United States. Therefore, a great proportion of individuals result to jettisoning the citizenship thus becoming citizens of the host nation, in an attempt to avoid double taxation. However, in other developed nations, people working abroad are held as non-residents thus illegible for taxation.

Studies show that innumerable applications for citizenship termination languish at many American consulates prior to their processing. This depicts the reasons for adopting the permanent residence for the emigrants (Yang 7). Furthermore, the fiscal guidelines results to barriers thus inefficiency in international trading. With the accelerating growth in globalization, the America’s future competitiveness is likely to halt due to such policies.

The policies enacted during the great recession period are likely to cause long-term consequences. According to Gale and Auerbach (2), the U.S national expenditure would tremendously grow in the next ten years. The 2009 fiscal year estimates indicated a growth in the total fund utilized for medical care purposes thus the imbalances amid the revenues and spending in future. However, the CBO professionals argued that, cutting down the expenditure on medical care, would help reduce the fiscal gap (Gale & Auerbach 2).

After a detailed scrutiny of the above propositions, realization of the anticipated goals require elongated time duration. Therefore, it reckons obvious that the policies endorsed during Bush leadership contributed significantly to the fiscal gap. Additionally, the research confirmed that the elevated fiscal gap would not trim down soon because of the fall in government payments and the increasing rate of taxation.

The resulting outcome would be a long-standing national debt to the GDP ratio. However, proposals by diverse entities advising for diminishing interest rates that help lessen the size of the national debts upsurge would not aid bridge the fiscal gap (Gale & Auerbach 3). Contrary to people’s expectations, reduction in interest rates only reduce the costs incurred in checking the debt.

The policies enacted all through the economic downturn enhanced the spending. Sources indicate that this would eventually result into augmentation of interest rates. The result would be a fall in investment, therefore, a condition referred to as “crowding out” (Melvin & Boyes 185). Contrary to the diverse types of transactions, investment is highly sensitive to alterations in the interest rates thus greatly affected by the fiscal policy changes.

Additionally, when the government incurs deficits, it resolves this through borrowing from other entities usually from overseas or issuances of bonds. Therefore, these bonds eventually result to the swell in interest rates. The boost in interest results to a decline in aggregate demand a condition highly contradicting the provisions of the fiscal policy. In addition, despite the government’s efforts of reducing inflation, it is apparent that time inconsistency would result.

As predetermined by Melvin and Boyes (185), such policies would culminate into inflation due to the government’s efforts of increasing spending. Furthermore, the recent recession in the US resulted to tremendous job shortages (Melvin & Boyes 196). To counter such challenges, most of the enacted policies aimed at creating more opportunities. However, such policies resulted to job scarcity because of inflation.

Summarily, the government enacted numerous policies during the recession, which endeavored to boost the economy growth. Despite the many benefits from these monetary and the fiscal policies, they also presented numerous short-runs as well as long-range challenges.

Many of the acts formulated would result to low output, inflation and the rise in government debt. The amplification in interest rates on funds presents a decline in private investment. Furthermore, inflated government spending presented a dilemma on healthcare. However, despite the high proportion of consequences of the policies, the benefits associated with them are considerably more.

Works Cited

Auerbach, Alan. & Gale, William. The economic crisis and fiscal crisis: 2009 and beyond. 2009. Web.

Dennis, Robert. Budget and economic outlook: Fiscal 2010 to 2020. Philadelphia, PA: DIANE Publishing, 2010. Print.

Melvin, Michael. & Boyes, William. Economics. New York, NY: Cengage learning, 2006. Print.

Straus, Jacob. Lobbying the executive branch: current practices and options for change. Philadelphia, PA: DIANE Publishing, 2010. Print.

Yang, Susan. Policies for increasing economic growth and employment in 2010 and 2011. Washington, DC: DIANE publishing, 2011. Print.

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"The Effects of Monetary and Fiscal Policy in USA." IvyPanda, 10 Oct. 2018, ivypanda.com/essays/the-effects-of-monetary-and-fiscal-policy-in-usa/.

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IvyPanda. 2018. "The Effects of Monetary and Fiscal Policy in USA." October 10, 2018. https://ivypanda.com/essays/the-effects-of-monetary-and-fiscal-policy-in-usa/.


IvyPanda. (2018) 'The Effects of Monetary and Fiscal Policy in USA'. 10 October.

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