Fiscal and Monetary Issues in America Economics Term Paper

  • Length: 8 pages
  • Sources: 8
  • Subject: Economics
  • Type: Term Paper
  • Paper: #73454786

Excerpt from Term Paper :

Fiscal and Monetary Issues in America


There are high tensions in the American economy today resulting from speculations whether the government will be able to hit the debt ceiling. Failure to hit the debt ceiling has serious economic effects to many sectors of the economy both in the United States and various countries of the world. Political disagreements regarding the budget delay decision-making process as the date ceiling draws closer each day. The government debt will cause disruption and failures in the U.S. market system and beyond because some rates will double while others will completely fall. The consequences of these are both the government and private sector failures and the economy will not be in a position to sustain itself. Government securities will lose market value and the cost of bonds will double because of the risk premiums. The result of this is government deficits, which will require borrowing.

Application of any fiscal or monetary policy to regulate the economy will highly depend on the economic approach adopted by the nation. The economic approach adopted should allow the control of key sectors of the economy by using either monetary or fiscal policies. The main fiscal policies are taxation and government expenditure while monetary policies involve the use of the central bank to control the amount of money in circulation. Studies show that, the post-Keynesian approach is the best due to common uncertainties in today's economies. According to studies by Eichner & Kregel (1975), the post-Keynesian approach acknowledges the importance of integrating political and social structures as the best determinants of the market outcomes. Keynesian explains the importance of government participation in the economy in regulating and controlling important sectors that cannot remain in the private sector. In the study by Eichner & Kregel (1975), government participation in the economy provides an environment to apply the fiscal and monetary policy.


Monetary and fiscal policies are two major strategies used in any form of government to regulate and control various economic conditions in a nation. Monetary policy refers to the strategies employed to manage the quantity of money in circulation within a country. This policy is applied by the central bank of a country through using certain monetary measures that will control the amount of money within the economy. Fiscal policy refers to those techniques that the government may apply to increase or reduce its expenditure in order to control the economy. Various factors influence the applicability of these two policies in the regulation and control of the economy. Among the main factors that influence the ability of these policies in the American economy today is politics. The current economic issues in America are the disagreements among the political parties concerning the federal budget proposals.


Various economic policy issues affect the current economic conditions in America. The biggest concern in the America today is the political disagreement between the Democrats and the Republicans. This disagreement concerning the federal budget has great effects on the U.S. economy especially on the ability of the government to repay its debt. The republicans refuse to vote for the proposed budget claiming that they are taking a stand on principles. The main principle that Republicans stand on is the fact that the proposed ObamaCare idea is unconstitutional. Studies show that the Conservatives claim the budget will be too expensive for the government and that it extends the constitutional powers. Political disagreements on key economic elements such as the budget have a tremendous consequence on the national economy. According to Person & Tabellini (2003) studies on the effects of constitutional rules on economic policymaking and performance, we find out that constitutional reforms may have a great effect on the economic condition of a nation.

Studies show that the current hard economic condition in America is the result of hard-line conservatives blocking the majority rule so that they can get their way, especially in the coming elections. Political disagreements between Republicans and Democrats arise from differences in the budgetary allocations of funds especially in the health sector. The Republicans favor funding of certain programs like veterans' benefits and national parks in contrast to the proposals of the Democrats. Economically, these disagreements may result in failure of the government to repay its debt. This is because the government will run out of cash and investors will demand higher compensation to hold the government debt that matures soon. The higher compensation will result from a default risk premium. The default risk premium will further cause a sharp rise in the cost of treasury bonds such as T-bills. According to Burton & Brown (2009), the effect of late debt servicing by the government is an increase in the government deficit, which can only be financed through further borrowing. In this case, the debt must be rolled over.

The economic implication of government failure to meet its debt is the swooning in of equity markets and spiking of the short-term U.S. treasury interest rates. On the other hand, this condition causes longer-term interest rates to flatten. In general, politics has significant effects on economic policymaking in U.S. And failure to come into consensus before the debt ceiling will further cause tremendous effects on the economy. Failure of the United States regime to hit the debt ceiling will have economic effects and pose severe risks to financial markets. According to studies by Burton & Brown (2009), government actions have effects on the performance on key economic sectors of the nation such the financial sector. Participants in both banks and non-banking financial institutions will lose confidence in the economic performance of the country and the safety of their investments.

Economic effects of the current situation in American will create uncertainty to investors, cause market disruptions and drives up the cost of borrowing. Failure to meet the debt on time will seriously disrupt the already fragile U.S. economy and in several parts of the globe. Current studies and economic analysis in the U.S. indicate that dysfunctional government is the most serious problem for the nation. These uncertainties in debt repayment pose further threats to jobs and failures in many sectors of the economy. Studies by Alper & Forni (2011), point out that a change in government debt results to a deficit, which affect the long-term real rate. The study further points out that increase in deficits translates into a rise long-term debt. With the uncertainties in debt repayment, economic growth will also be hard. Political misunderstandings alter the smooth flow of policies that benefit long-term. Studies show that conditions for growth are currently less favorable than before.

Slower growth in economic development due to poor debt servicing by the government will lower labor participation, labor quality and growth in capital deepening. Implementation of economic policies in such an environment becomes difficult and leads to further deterioration of the economy. Research by Burton & Brown (2009) indicates that, for effective implementation of economic policies, the financial sector must be strong to facilitate adequate availability of financial services. Disruption in the securities' market causes slow growth and lagging in many sectors of the economy. These poor economic structures not only affect U.S. But many other countries, which depend on U.S. financial aid in any way.

To remedy such situations the government through the central bank can control and regulate the economy using monetary and fiscal policies. The effectiveness of monetary and fiscal policies depends on the underlying macro and microeconomic environment of the nation. The suitability of these policies in regulating the economy will depend on the school of thought that economic policy implements believe in. The economic approach, the policy makers, adopt influences the applicability of fiscal and monetary policies. There are six approaches to economic thinking and economic policymaking. The first approach to economic thinking is an approach by institutional economists. According to studies by Samuels, Biddle & Davis (2003), this economic approach emphasizes the importance of institutions in economics. This approach arose from the American institutionalists during the war where it focused on reforming, redistributing and interventionist economic measures. It, however, allowed a variety of policies and focus on how institutions affect individuals and how the institutions themselves evolve over time.

Institutionalists argue that institutions are important social constructs that could improve the welfare of the people. The policy approach of this economic thinking requires a pragmatic alteration of the institutions that shape economic outcomes. This requires the utilization of indicative planning where the government prioritizes the sectors to direct credit and other forms of financial assistance. This economic approach provides an easy way for the government to intervene in the economy. The government can apply fiscal policy measures such as cutting on government expenditures and increase taxation to control macroeconomic issues on the economy such as inflation. The approach emphasizes on the establishment of strong institutions in the country, which influences the pace of economic development. Controlling the activities of these institutions by the government is also easy and performance measurement is easy to regulate. Samuel, Biddle &…

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