Economy, Monetary Policy, and Monopolies \"The Benchmark

¶ … Economy, Monetary Policy, and Monopolies

"The benchmark interest rate in the United States was last reported at 0.25%," (United States interest rates, 2012, Trading Economics). This is one of the lowest interest rates ever recorded in the history of the U.S. economy. It is a manifestation of the Fed's recent attempt to spur economic growth by encouraging consumers to borrow and spend more and to alleviate the pressures upon debt-ridden consumers, particularly those with adjustable rate mortgages. As a point of comparison, the interest rate in April 2007 was 4.963 (April, 2007, Treasury Direct).

current inflation rate is 2.30% while in 2007 it was 2.85% (Current inflation, 2012, Inflation Data). Although a lower inflation rate, in general, is better than a higher interest rate, this is keeping with the overall perception that the U.S. is in weaker economic shape than it was five years ago. Of course, as manifested in the 1970s, it is possible to have 'stagflation' or high interest rates and high unemployment, which the U.S. is fortunately not manifesting. Still, the U.S. unemployment rate currently stands at 8.1% (Economy at a glance, 2012, BLS). While this is an improvement over the statistics of 'the great recession' of 2008, in 2007 the unemployment rate was 4.6% (United States unemployment rate, 2012, Info Please).

Q2. One way to rapidly stimulate the economy is to free up the money of people who tend to spend a larger proportion of their income upon commodities rather than save their additional income. Poorer people tend to spend a larger proportion of their income on goods and services, and have greater immediate need for physical items, so giving more money back to poorer members of society via fiscal policy can encourage consumption. For example, slashing the interest rates on student loans will enable young, struggling graduates just starting out to have more income to spend on rent, food, and other necessary items. Younger people starting a new life have more commodity-based needs, but many have been unable to spend money because of the prohibitively high student loans they are facing, and a weak job market that has disproportionately penalized young people.

Employing more people in public works projects and infrastructure projects would also stimulate consumption. Once again, this puts money in the hands of people who currently have physical needs they cannot satisfy because they are out of work and have no steady income. This measure would also employ workers in the construction industry, one of the hardest-hit, traditionally blue-collar sectors of the recent recession.

Q3. Perhaps the most famous breakup of a monopoly was the government's dissolution of AT&T. For many years, the telephone industry functioned like a monopoly because of "1. The intentional elimination of what was considered wasteful or duplicative competition...2. The mandated social policy of universal telephone entitlement, which implicitly called for a single provider to easily carry out regulatory orders; and 3. The regulation of rates (through rate averaging and cross-subsidization) to achieve the social policy objective of universal service" (Thierer 1994). Promoting universal telephone service was seen as a universal good, and thus AT&T's monopoly was justified. However, "the transition from electromechanical to electronic components permitted new, more powerful, and eventually less expensive customer premises and network equipment," which lowered barriers to market entry by AT&T's competitors (A brief history: The Bell system, 2012, AT&T).

Eventually, the U.S. government, which had allowed AT&T to operate as a monopoly, brought an antitrust suit against the company in 1974. The resulting settlement achieved in 1982 required AT&T "to divest itself of the wholly owned Bell operating companies that provided local exchange service. This would, the government believed, separate those parts of AT&T (the local exchanges) where the natural monopoly argument was still seen as valid from those parts (long distance, manufacturing, research and development), where competition was appropriate" (A brief history: The Bell system, 2012, AT&T). Despite the breakup of AT&T, rates for telephone consumers did not plummet, and today, more regulation of the rates of phone calls (including cellphone calls) and a controlled monopoly might be welcomed by many users.

Q4. Customers tend not to be alienated by discounts if the members of the group are in a protected category widely regarded as such by society, such as senior citizens or children. There is a sense that senior citizens have 'paid their dues' to society and are entitled to special consideration and children do not have the full obligations of adults and are often accorded special privileges. Another method of identification is through market research, and sending discounts for the product or service through the mail via coupons or loyalty cards, so it is not immediately obvious that specific customer demographics are receiving a discount.