Fiscal Policy: The United States Fiscal Policy

¶ … Fiscal Policy:

The United States fiscal policy affects all types of economic and financial decisions within the country. In addition, the U.S. fiscal policy has significant financial and economic effects on other countries across the globe because America is the largest economy worldwide. Generally, monetary policy is geared towards influencing the performance of an economy as evident in various factors like employment, economic output, and inflation ("U.S. Monetary Policy," n.d.). This is achieved through the effect of the policy on demand across the economy i.e. The willingness of individuals and firms to spend on goods and services. Some of the most common monetary policy tools that affect demand include government spending and taxes. However, many individuals remain largely unfamiliar with fiscal policy and its related tools. As the nation's central bank, the Federal Reserve System carries out monetary policy and influences demand through either increasing or lessening short-term interest rates.

Effect of Tax Cuts:

Tax cuts can be described as reduction of the percentage or amount of taxes that the government imposes on citizens or firms. In this case, the government reduces the amount or percentage of taxes it had been collecting from taxpayers. Notably, a tax cut cannot be carried out on taxpayers unless these people were paying the specific taxes in the first place. Generally, when the government increases or profits from taxes, firms usually report increased costs and fewer profits. In contrast, individuals report less income, hide their money, and purchase tax shelters when they experience higher income taxes (Williams, 2011). As a result, avoiding taxes has become a common attempt among all individuals i.e. The rich and the poor.

Notably, differences in tax rates tend to have far reaching impacts on the country's economic growth as compared to federal revenues. If the government imposes tax cuts for 95% of all households, the firm is likely to experience lesser costs and increased profits. This is mainly because increased taxation contributes to greater costs and fewer profits for corporations and other firms while resulting in increased federal revenues and profits. Therefore, a reduction of taxes for 95% of all households will result in increased profitability for the firm. This profitability is also attributed to the fact that taxpayers will increase their expenditures i.e. spend more money. In this case, citizens will not hide their money but will spend more, which leads to increased profits for the firm.

Government Bailout:

Government bailout can be described as a situation in which the government provides money to a failing business in attempts to prevent the outcomes that are likely to occur from a business's downfall. These bailouts usually take place in various forms such as bonds, cash, loans, and stocks. As part of initiatives to rescue the business from potential downfall, the bailout may or may require reimbursement.

From a traditional perspective, bailouts have taken place in businesses or industries that may be considered as no longer viable or merely sustaining huge losses by the firms. In most cases, these firms employ a huge number of individuals to an extent that there is a perception that the economy would be unable to sustain the number in case of unemployment. An example of government bailout that took place in the early 1980s was that of Chrysler, a large automaker in the United States that was in need of bailout in that period. The American government bailed out the firm through providing nearly $1.2 billion, an amount that the reimbursed ("Bailout," n.d.).

In the past few years, the government has played an important role in bailing out some industries and businesses. Since this is a form of government spending, the bailout has had direct and/or indirect effects on the industries. The biggest bailouts to occur in the country is that proposed by the United States government in 2008 that involves bailing out several financial organizations that were affected by the credit crunch with nearly $700 billion. Moreover, the automotive and insurance sectors have been the most bailed out industries by the U.S. government in the recent past.

As one of the major players in the banking industry, government bailouts in this industry have had direct and indirect effects on banks. These bailouts were geared towards restoring stability and encouraging lending in the financial sector despite of the minimal evidence regarding the long-term effects of this intervention. Since the company was largely affected by the global financial crisis, the government bailout was timely and an effective intervention measure. This intervention measure had a direct impact on the firm on the basis that it helped in restoring stability of the company's financial operations and encouraged lending in the monetary sector. Therefore, the intervention helped the firm to avoid a potential downfall and huge losses that characterized the crisis.

Advantages and Disadvantages of a Government Bailout:

While there are various forms of bailouts, government bailouts usually occur in the form of cash through direct assistance or a loan. This intervention always takes place in order to prevent the firm or industry from probable financial collapse. Even though the series of bailouts by U.S. government in 2008 and 2009 were largely criticized, they had significant benefits for the entire country. However, the government bailout programs and measures have certain advantages and disadvantages.

The main advantages of the bailouts include saving the economy since the intervention is carried out in order to prevent a single failing company from collapse and the entire economy (Wolfe, n.d.). For example, the government bailouts through the Troubled Asset Relief Program (TARP) was conducted partly because of the fear that collapse of some financial institutions would significantly damage the entire financial sector and destroy the whole economy. The second advantage of government bailouts is protection of vital services since the intervention occurs in industries that are significant to the country's operations. These bailouts are provided to the industries because if their services are disrupted, the economy would suffer. Through the bailout to significant industries, the government fulfills its major function of providing important services to its citizens. Third, the bailout is carried out to prevent people from losing their jobs in case of collapse of the industry or company. The bailout can also contribute to return on investment where the government makes some profits when the firm pays back the loan.