Economic policy is discussed all the time but never more so than during election campaigning. And, everyone has magic answers to the problems of modern society that they will enact when they are elected.
Unfortunately, much of what is said just isn’t true or doesn’t work the way the politicians tout it will. And we, the citizens, are paying the price.
There are two primary types of economic policy. Monetary policy and fiscal policy are both tools used by governments to attempt to control and moderate swings in the business cycle, stimulate growth and provide stability.
Monetary policy is what the government uses to try to control growth, inflation and how much money is in circulation as well as its velocity. It is the realm of the nation’s central bankers (in the US, that is the Federal Reserve Bank). It deals with things like interest rates, the size of the money supply, and bank reserve requirements (how much money banks must keep on hand to meet depositors requests for money).
Fiscal policy deals with things like taxes and government spending. If you wonder why we have crumbling roads, lead laced water mains and tainted food (among other things), you have to look towards fiscal policy to address these problems.
In the area of monetary policy, a common cry is to return to the gold standard. Bad move. One of the reasons that the US and most of the world uses fiat currency (that is money they print when they want or need to) is because gold varies wildly in value over time. But even more important is the fact that doing so would remove one of the most effective tools the government has to moderate the normal fluctuations in the business cycle. Locking our money supply into the price of gold would make it impossible for the government to finance anything. This would be akin to you not being able to buy a house unless you had the full purchase price.
Another common cry is for the Fed to be put under the control of Congress. Yet another bad move. The Fed’s independence allows them to control the currency without the sway of politics. Currently, our Legislative branch agreeing on naming post offices. And we should want them to control the money supply?
But even more important, in my opinion, is the current state of Fiscal Policy in the US. In a headlong rush to reduce taxes we have essentially mortgaged our future. If we continue to cut taxes, there will be no money to fix the roads and bridges (the Transportation fund has not had a rate increase in over 20 years and is essentially empty!). Without a healthy infrastructure, we are and will continue to be at a competitive disadvantage compared to other more modern nations.
And if we keep reducing taxes on the wealthy (the old supply side economics argument, which has been repeatedly debunked as false), yes the wealthy will have more money but, just how much of their additional income is going to go back to the economy in the form of consumption? Virtually none. The rich use that money to fund further investment (which might or might not be in this country) and savings. They don’t need any more “stuff”. They already have all they need. On the other hand, a tax reduction on the lower oh, 98% or so, winds up being largely spent on goods and services, which stimulates further growth.
I submit that the reason for our current flat growth rate scenario is in large part due to the fact that while the Fed has gone to the mat to try to address current issues using Monetary Policy, they are at the end of their rope in terms of capabilities. The Legislative branch must step up and use its Fiscal Policy powers to stimulate spending by the government in order to get the economy to grow faster. Lowering taxes alone isn’t going to do it, especially if it all happens at the top. Spending must be a part of the solution.