Recessionary Spending, Essay Example

An Analysis of the U.S. government’s fiscal and monetary policies

Posed the question, how does the Government justify creating more debt in recessionary periods?  The U.S. economy is market oriented, and government decision to spend must support decisions made by private individuals and businesses, and without governmental direction with the exception of key energy related and consumer safety sectors. In recessionary period such as the current one discretionary spending in key sectors like defense and agriculture make up the majority of those increases. Private and public investment in diversification promises to enhance potential of decreasing the jobless rate, and in support of sectoral growth.

The capacity to adjust fiscal policy according to cyclical developments is limited, and the imposition of taxes and spending is delimited primarily by budgetary allocations and balancing in order to meet obligations. In addition to employment and trade advancement, federal policy in this area is designated at core state administered infrastructure, and including defense which constitutes the largest expenditure within the U.S. federal budget and also serves to promote light and heavy industrial interests, and especially the aforementioned manufacturing sector in aerospace and related stockholder vested spheres.

Analyses of the present U.S. economy point to an uneven pace across sectors, with manufacturing leading the economic upswing in supplying demand, and with general spending restrained despite the fact that federal spending is expected to rise. In the past two quarters, the Federal Reserve has maintained a low inflation index of approximately 1.4%, and the Reserve is expected to retain short-term interest rates at their current extremely low levels until the fourth quarter of 2010.  Constraint has supported a policy of raising the discount rate for projection closer to pre-crisis levels. Moderation is expected across the board. Capitalization on labor is in effect critical as contribution from usage of the working population impinges on total factor productivity to slightly lower than normal rates making creation of jobs critical in fiscal policy toward increased productivity.

Although the U.S. President can propose certain tax agendas to match spending projections, all tax legislation is enacted in the House of Representatives. Concurrent budget resolutions are achieved in joint decision by the House and Senate and ratified with signatory by the President. Budgetary allocations of $1.121 trillion are earmarked for 2011 — $30 billion more than 2010. Monetary policy coinciding to increased spending projections, however, is crafted by the Federal Open Market Committee of the Federal Reserve Board, and implies inflation target rates that will affect purchase or sale of federal agency securities and cost and availability of credit.

In commentary on the federal government’s recession era spending plan supports a supply side economics to manufacturing and related sectors, that stands to do much in terms of promoting private investment in those factors as seen in the Reagan years, when investment rather than hoarding of cash triggered  growth. Here we see the main distinction between the Depression era economists, British Economist, John Maynard Keynes and Austrian Economist, Friedrich A. Hayek. Government spending seen as the cause of all depressions by Keynes, was countered by Hayek in his argument that increasing the flow of money no matter from which sphere of the market, and including the states, spending financed by deficit in the last instance serves to benefit the economy. Tangential to this issue, are the rising protectionist tendencies witnessed in U.S. federal trade policy in dispute with other member states in the WTO instigated by increased protectionist restrictions on capital flows at the global market level . In sum, Hayek offers a way out where Keynes does not. The flow of currency into the securities market whereby savings is transformed into investment spending by private agents is met with confidence if public spending is expanded.