Failure of Economic Policies Exploring

Failure of Economic Policies

Exploring Failure within Policies to Promote Economic Growth

As the American economy stands alongside many other nations struggle within the depths of the current recession, many wonder what policies will actually work. There are so many different economic practices that are but into place in order to help spur economic growth; yet, unfortunately many of them fail. The economic policies of increasing government spending, cutting taxes, and more drastically revaluating currency have proved to have some success, and also some major failures. It is thus clear that policies to pursue economic growth do not necessarily bring about economic development and poverty alleviation, and some can ultimately fail because of the design of implementation or execution.

The focus of this study is to explore three major policies which are often used in times when an economy is lagging in terms of its growth. It examines important literature outlining the policies and the economic theories which stand behind them as their primary foundations. Such policies to be examined here include that of increasing government spending, cutting taxes, and revaluating currencies. The study then moves to explore real life examples of these policies put into place as a way to show that in many cases they fail to provide the growth and balance they were meant to. Such exploration of failed policy implementations will help show that although these policies may work in specific contexts, they may not always prove so successful in the wide breadth of situations present within the current global economy.

Increased Government Spending

There has long been a trend in modern economics which posits increasing government involvement as a way to help stabilize the markets. Thus, increased spending has often been considered an appropriate option for economies finding themselves in stagnation with very limited chances for development otherwise. Increase spending means increased government reinvestment and involvement within the economy itself. This was a major component of John Maynard Keynes which was critical in the development of Keynesian economics. Essentially, the theory behind the policy states that sometimes the private sector is inadequate for creating the necessary balance within an economy in order for it to thrive and grow (Keynes 2006). In many cases, the private sector can lead to inefficient results, and thus the markets cannot be entirely trusted to work independently on their own. Thus, a strong central authority can help invest into the markets as a way to stimulate their growth and further development towards a status of balance. Keynes was demanding strong government participation within individual economies as a way to stimulate market conditions (Keynes 2006). Therefore, reinvestment is a major element which is supposed to help spur the markets. As more and more government money flowed back into the consumer markets, the policy was thought to help better restructure a more balanced market with more reliable consumer behavior. With this in mind, such policies recommend increased government spending as an appropriate way to help stabilize the economy. The first step in this policy is the successful creation of jobs. It is important to keep citizens employed so that they can retain their power within the free market system. Keynes has stated "When employment increases aggregate real income is increased," (Keynes 2006 p 25). Therefore, increased government spending is primarily directed at created new employment opportunities. This expansionist fiscal policy aims to help reconstruct a broken free market environment. This can only be accomplished through heavy government reinvesting back into the economy, for "Employment can only increase with investment," (Keynes 2006 p 102). Such strong reinvestment policies are conducted only within a limited time frame, in order to allow an economy to rebalance itself. Then, the reigns are normally placed back into the hands of the free market system, allowing the markets to essentially regulate themselves.

Reinvestment most often occurs into the areas of domestic infrastructure or helping domestic businesses through low interest loans to keep domestic business going through tough economic times. Essentially this is conducted to raise incomes. This then aims to "put the economy back on its path of positive economic growth," (Utt 2008). Thus, there is an increase overall consumer spending (Keynes 2006). This then increases levels of domestic production and trade, which helps restructure the free markets with enough strength to push through stagnate economic times to encourage new economic growth. Reinvestment into infrastructure is a common economic policy to help pull an economy out of a stagnate economic position and better arm its citizens with the power to continue spending -- which is so crucial to the health of the private markets. Therefore, such heavy government reinvestment is often advocated by trade industries that would stand to benefit from such policies increasing government spending on various infrastructure contracts (Utt 2008). Within Keynesian theoretical framework, this means that "public works even of doubtful utility may pay for themselves over and over again at a time of severe unemployment, if only from the diminished cost of relief expenditure," (Keynes 2006 p 114). Thus, roads, railroads, as well as transit builders and operators are all very supportive of such policies. This can have a big influence on governments based on the commercial power and demand of such utility industries.

Throughout the years, the United States has relied on turning towards such Keynesian policies as a way to help spur economic growth and guide the American economy out of terrible depressions and recessions. There have, in fact, been several instances of U.S. implementation of such policies. Most notably was in the middle of the twentieth century with Franklin D. Roosevelt's New Deal after the Great Depression had established a major hit on the United States in the 1930s. The New Deal was split into two major sections, which took place between 1933 and 1936 (Venn 1998). Roosevelt's administration set into place heavy reliance on government spending in order to help restructure the beaten American economy in the years after the onslaught of the Great Depression. The economic policies were primarily split into two sections, recovery and reinvestment. Recovery programs helped relieve the poor who were suffering through the context of the depression. Welfare programs and emergency care programs were a major staple of the spending the government committed to during the 1930s. Yet, the reinvestment portion of such practices was aimed at recovering the economy, not the people. Thus, the New Deal and its subsequent policies also aimed to help empower consumers once again through increasing employment after the Great Depression depleted American industries. There was a "large-scale public spending to sustain American prosperity," (Venn 1998 p 97). Thus, the government spent millions in programs aimed at employing an unemployed American workforce and returns some power to the consumer to help spur further domestic production in a time of great need. In this, the United States government aimed to help restructure the economy through bringing balance back into the economy. Research suggests "Instead of emphasizing a restriction of production to meet a restricted demand, the Roosevelt administration thereafter sought to increase consumption through the provision of relief payments, the welfare spending net and policies intended to maintain wage levels," (Venn 1998 p 52). Several organizations were created in order to help get America employed, including the Works Progress Administration (WPA) and the Tennessee Valley Authority (TVA) (Venn 1998). Such organizations helped build roadways and restructure a new and impressive infrastructure into a modern America. The TVA also helped employ thousands of Americans in jobs creating trails and roadways throughout America's wilderness and parks. The policies of the New Deal actually saw great successes. However, we must remain speculative on exactly how much increased government spending really lead to such success. Although it is clear such policies helped restructure the economy, so did World War II. War is big business, and with America's entry into the war meant a different kind of increased government spending that went beyond the reaches of economic policy, but still had a major impact on the strong economic status America enjoyed for years after the war.

As the United States has found itself in another economic stalemate, the recent Obama administration has once again re-invoked the elements of such policies. Recent implementations during the latest economic recession show a trend of increased government spending once again to help rebalance the struggling American economy. President Obama and his administration have increased spending and created legislation like the Job Creation and Unemployment Relief Act of 2008 (Utt 2008). This act will spend $58.2 billion between 2009 and 2013 in order to help get Americans employed and increase their overall spending power. Research suggests that "This focus stems in part from a belief that much of our infrastructure has deteriorated and that a substantial investment in its essential long-term growth and prosperity while also providing jobs and profits in the present," (Utt 2008). Yet, as we continue to increase our spending, we must still be weary of how successful such a strategy could actually be.

Japan actually presents a case which shows this strategy as being wholly unsuccessful. Japan was once on a stellar track to economic prosperity. The end of the twentieth century saw promising chances for the island nation's economy. In 1991, the government spending was one of the lowest the Organization for Economic Co-operation and Development (OCED) and 31.6% of the nation's GDP (Utt 2008). That same year, Japan's national income was at 86% of the U.S. gross national per capita income, a big improvement from just 20 years ago when the nation was only making 66% of the U.S. per capita income. This was an impressive feat for the nation to embark on. Yet, this was to change in the following years dramatically. During the later decade of the 1990s, the Japanese government took on the practice of vastly increasing government spending as a way to stimulate an economy that was beginning to lag. As the growth of the economy began to go stale, the government took to a policy similar to that of FDR and his administration's New Deal. The government hiked up its spending and reinvesting dramatically in order to help structure much desired future growth for its economy. Research shows that "Beginning in 1991-1992, Japan adopted the spending approach now advocated by many in the U.S. Congress when it embarked on a massive nationwide program of infrastructure investment," (Utt 2008). Over 30.4 trillion yen, or $254 billion USD was spent on such programs (Utt 2008). This actually resulted to a decline in Japanese economic performance. From 1997 to 2000, only small increases in economic productivity. What eventually resulted was a "consequence of two decades of economic stagnation," (Utt 2008). Per capita income fell to 73.7% of the U.S. per capita income levels (Utt 2008). Research states that "Although the benefits of a costly, infrastructure-focused stimulus package based on massive gov-ernment spending may be intuitively attractive, past evidence suggests that the impact of govern-ment spending programs that are intended to encourage economic growth is very modest and unlikely to enhance recovery or deter recession," (Utt 2008). Thus, it was clear that the policy implementation of increased government spending was incredibly unsuccessful.

Overall, the policy has its benefits in certain situations, but can prove to be a failure in others. It is clear that intense government spending will not prove as successful as one might think. As more and more legislation currently being passed in the United States today turn toward increasing government spending, it is imperative that we do not rely on it entirely.

Cutting Taxes

In lieu of government spending, many economists advocate another fiscal policy as an option to help spur economic growth -- cutting individual and corporate taxes. This is basically the opposite approach when looking at increasing government spending. Cutting taxes decreases the central power of the government. This actually takes money out of the domestic treasury, even in times of crisis. Yet, still cutting taxes provides stronger buying and bargaining power for individuals and businesses in that the policy saves them much needed money. Cutting taxes gives people money back into their hands when they need it most. Research suggests that "Many economists believe lower taxes and lower interest rates would help stimulate the economy, though it could take another six months before the impact is felt," (Redeker 2010 p 1). Such a policy helps increase corporate profits, and therefore corporate reinvestment back into a broken economy. This policy goes straight to the pillars of the economy, rather than trying to start from the ground up at the consumer level as in the case of expansionary fiscal policies. The policy of cutting taxes creates a stimulus within the tax cuts themselves (Redeker 2010). This is done by increasing aggregate demand. In fact, "it can lower taxes and hope that consumers take their tax breaks to the mall," (Wolfers 2009 p 1). And so, cutting taxes is supposed to help save the economy through passing the savings to the consumers.

Several American Presidents have dabbled in utilizing tax cuts as a primary fiscal policy. Ronald Reagan in the context of the 1980s was one that was heavily associated with Republican orientated tax cutting policies. There were primarily aimed to lower inflation (Egan 1980). Yet, still many economists saw these tax cuts as "one-dimensional, simplistic and without any apparent cohesion or depth," (Egan 1980 p 6). Notoriously, President George W. Bush was also associated with one-sided tax cuts. Still, despite the notion that they will increase spending power, such policies have had limited results. It is clear that alone, tax cuts cannot solely rebalance an economy to prepare it for growth.

Revaluation of Currencies

The revaluation of a currency is a drastic step to take for a nation in dire straights. Yet, many nations have utilized such strategies in order to regain some footing in the international arena in terms of their economic collateral of their own domestic currencies. According to research, revaluation "can stabilize the value of the domestic currency by refixing the value of the domestic currency in terms of foreign currency whenever a large deviation in the market rate and the fixed exchange rate occurs," (Pailwar 2010 p 417). This can help bring stability in a developing nation which finds itself in a precarious situation rampant with extreme inflation. Revaluation is a drastic move, but one which economists say can help improve the value of a currency based on curbing inflation. Research suggests that "Continuous inflammatory pressures in the economy and the continuous surplus on the current and capital account may necessitate a revaluation of domestic currency," (Pailwar 2010 p 417). Revaluation is supposed to also have an impact on how the currency can stand against other nations' currencies. With this, economists suggest that revaluation can help make domestically produced good more expensive in foreign markets (Bozyk 2007). An example of China shows that some nations can pull of revaluations, and since revaluating the yuan the Chinese economy has continued to grow.