Policy Choices of the Future Term Paper

  • Length: 8 pages
  • Sources: 3
  • Subject: Economics
  • Type: Term Paper
  • Paper: #39571207

Excerpt from Term Paper :

To increase effective demand, Keynesians believe the government must balance the economy with deficit and increase expenditure. However, the constant alternation between booms and recession is causing the booms to get shorter while the recessions become longer. This phenomenon is the result of empirical evidence that indicates that in the end, the interest rates decrease.

However, this situation creates a problem of capitalism as the rich increase their wealth while financial deficit worsens. Minsky adopted the perspective of Keynesians, hypothesized financial instability, as the finance and money that connects the present with the future, but the future is uncertain. Minsky finds the problem of financial stability is in financing. However, financial instability increases under contemporary capitalism, which increases economic crisis. This leads to the conclusion that to solve economic crisis, there is a need to reduce financing and take up investments in real economy.

This is in contrast to the Keynesian economists that believe on the demand side of the economy. Mainstream economists make the argument that the main driving force of the recession was supply problems like labor market frictions or labor supply shock. Therefore, the Keynesian theory is rejected by mainstream economists, since it proposes the utilization of fiscal policy as a way of affecting aggregate demand as a means to solve economic crisis. Mainstream economists also make the claim that since the crisis was the result of negative supply side shocks, policies that affect aggregate demand have a minimal effect after the aftermath of the economic crisis. In the worst case, mainstream economists believe that an increase in aggregate demand by fiscal policies can cause a rise in deficit for America, and cause debt financing unsustainable.

Mainstream economists form part of the classical theorists that hold the view that limiting the government's role in the economy. These theorists believe that without the government, the economic crisis would not have occurred. They make the claim that the government's fiscal policies increase the rates of interest leading to a decrease in consumption. Eventually, spending on investment also reduces and crowds out of the economy. Therefore, in light of this, classical theorists propose the solution for this crisis as the use of laissez-faire view of the economy. The application of this view in the economy leads to monetary policies controlling short-term economic frictions. Within the four theories that offer different explanations and solutions over the economic crisis, I prefer the views of the Minsky and Keynesian theorists.

This is because from this point-of-view, the economic crisis by definition, is the balance between the aggregate supply collapse and aggregate demand. Nevertheless, the mainstream and classical economic theories assume that the aggregate supply and demand are in equilibrium. Inherently, they embrace Say's law that states that if a society manages supply, another society will match with demand, and therefore, the general supply overflow will exists causing equilibrium within the economy. In reality, aggregate supply and demand are not in equilibrium as they fluctuate continuously. Therefore, any meaningful intervention in the market does not create any equilibrium of the economy. Instead, the utilization of fiscal policies can cause significant changes taken together demand that pushes the economy to equilibrium. Therefore, the interventions of the government using fiscal policies, which are supported by the Minsky and Keynesian theories, in reality stimulate the economy to escape current recession. Moreover, the empirical evidence of Minsky support arguments that is against the use of monetary policies as a means to recovery.

Looking back at the 1980s, it is evident that each time there was a change in the rate of interest or the supply of money, people affect each other to change their consumption leading to negative consequences. In that era, a decrease in the rates of interest or the supply of money increased, people turned to viewing their money as free money and ended up spending more. This excessive spending along with improved financing leads to an unsustainable household debt. This is because more people cannot sustain their debt, therefore, uncertainty in the economy increases and consequently, their confidence. Ultimately, during the boom period the reduced rates of interest created causes the financial system becomes more fragile (Fazzari and Cynamon 17). This evidence is an indication that while monetary policies offer incentives to capitalize on loopholes they do not offer solutions for solving the economic crisis.

Fiscal policies proposed herein to effectively and sustainably stimulate the economy towards achieving equilibrium are education and green energy. I recommend that long- and short-term policy goals for green energy should be part of fiscal policies. In the mean time, I propose the need for increasing solar and wind energy as alternative sources of energy. Many technologies have been created for harvesting solar and wind power and what is needed is for the facilitation of implementation of the technologies to achieve green energy. Short run policy goals for solar and wind energy will increase government spending by creating new facilities but will also create energy which will benefit consumers. In the end, I suggest the use f renewable energy, since currently, there is no renewable energy for each energy source creates waste leading to dire environmental concerns. However, for the successfully activation of the new energy market, governments need to invent new approaches to providing funds for the energy industry. Governments can encourage organizations to increase research and development through the subsidization to lower the scale barrier for the energy industry activation and the adoption of new technologies. In this essence, the financing of research and development of firms that specialize in creating renewable energy will assist in solving the shortage and negative consequences of traditional energy sources. In addition, a consistent spending in research and development acts as long-tem fiscal policies which ill control small market fluctuations. To create this big push and the activation in the new energy industry will require the use of worker and entrepreneur coordination.

Moreover, I recommend that the government should spend more on state universities like the building of housing and research facilities and buildings. Investment in universities will cause an increase in spending and will affect the aggregate demand. An investment in education will lead into a short run economic recovery from the recession. In addition, in the end this investment in education will cause an increase in human capital productivity, since more students educated in the universities will be educated in better and well-equipped environments. By definition of self-fulfilling prophecy, these efforts in investment in education will generate productive workers and will cause a big push to positive feedback between workers education efforts and entrepreneur's research and development efforts. This will also lead to an enhancement of the effects of fiscal policy as suggested earlier. An increase in spending by the government creates a population of individual's education by institutions of higher learning, thereby creating positive coordination of expectations according to the terms of prophecy. In a similar manner, an increase in spending on education in both short run and long run investments will only create benefits.

As mentioned earlier, I was greatly affected by the recession, therefore, creating a desire to analyze in details the main cause of the recession. In this paper, I have discussed the main causes of the recession and made several suggestions for a few policies, which have the potential to lead to growth and development of the economy. In the process of researching the main factors and suggestions for solving the economic crisis, I came to the realization that though we cannot make predictions of the future, we have the ability to prepare for what is going to happen by making analysis of the different economic policies and theories. In this manner, we cannot find ways out of the recession but we can also manage future economic crisis effectively.

Works Cited

Cynamon, B.Z. And S.M. Fazzari (2008) "Household Debt in the Consumer Age: Source of Growth- Risk of Collapse," Capitalism and Society, Revised Chapter 6.

Cynamon, B.Z. And S.M. Fazzari and Setterfield, M "Understanding the Great Recession" CFS Chapter 1.…

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