How to grow the economy

A lot of debates exists out there in the economic ether regarding the best economic structure for an economy. Even so, there is a broad amount of consensus that exists regarding what should be done during expansionary economic shifts and what is less than wise. With that in mind, the author of this report shall address a number of questions related to that overall topic including what should be done with taxes, government spending and the general tools of the Federal Reserve Bank including the changing of the reserve ratio requirements, the discount rate and the selling of government securities. There is also the question on what happens with things like aggregate demand, gross domestic product and employment. While predicting the outcome of economic efforts and policy can sometimes be hard to pin down, there are best practices that are generally held to be better than others when economic expansion is the desired outcome.

The typical reason for economic expansionary policies is when an economy is emerging out of a recession. A good and recent example of this was the years during and after the Great Recession. Indeed, that massive financial valley started in roughly 2007 and the recession did not "end" until 2009. The economy grow at a consistent yet tepid pace despite very low interest rates that are just now starting to be raised. Even so, what was done in response to the Great Recession ran the gamut of Keynesian investment to lowering interest rates and taxes as a means to prop up the economy or perhaps even jumpstart it. Generally speaking, an economy that wants its people to invest and grow will lower taxes, even if it is on a temporary basis. During the aftermath of the Great Recession, an example of this would be the Social Security tax "holiday" that many enjoyed. There were also tax incentives like the HIRE act that encouraged people to hire workers that were not employed. As far as government spending goes, there is typically an increase with that as well with the focus being on the aforementioned Keynesian spending. Meaning, while there is obviously a focus on supporting situations and problems that are more protracted during recessions like unemployment and welfare, there is also a focus on projects and spending that get the economy "going". The terminology de jour during the aftermath of the Great Recession was "shovel-ready jobs" (Sightings, 2012). There is even talk in more recent days of a massive amount of infrastructure spending to the tune of up to one trillion dollars to improve and replace the aging infrastructure of the United States and remediating problems in cities like Flint where water pipes contain lead and are otherwise decrepit and old. In short, improving economic times through government spending is not something that allows the economy to grow and sustain itself in an organic way but it can be a proverbial Band-Aid to the economy. Indeed, filling the void left by the private sector falling away is seen as a way to help out the economy until it can grow and thrive on its own accord (Bradley, 2017).

When it comes to the Federal Reserve, the widely-hailed tools that they make use of is the required reserve ratio, the discount rate and open market operations. One thing about the required reserve ratio in relation to the Great Recession is that a wide number of banks failed due to the economic travails that came about. Indeed, many banks were completely eviscerated while others were held in receivership and were gobbled up by the remaining banks. Beyond that, banks had to under go "stress tests" using revised fraemworks and tests and even the surviving banks were subjected to that. Indeed, one of the factors that would dictate the results of these tests would be how much the bank has in reserve from a ratio standpoint and what it could or should be to help the bank survive economic problems. Recessions like the Great Recession do not happen often. That recession was the worst one since the Great Depression which happened in the 1930's. The latter of those two crises proved, though, that having banks fail on a wide scale can be very damaging to the economy to the point where runs occur on banks and the financial system in general becomes rather unstable. The Great Recession was not nearly as bad as the Great Depression and the banking system weathered the storm. However, the Federal Reserve and the financial regulatory framework that existed in the last generation (but did not exist in the 1930's) is one of the main reasons why (Tarver, 2017).

When taxes are lowered, the general effect is that people and businesses spend more. What in particular they spend their money on matters as it might be something that is fleeting and temporary or it may also be something more enduring and investment-worthy. There is also the question of whether a lot of the people involved will just use the cash infusion to "catch up" on expenses and bills or otherwise sock away money for a rainy day. Regardless, the overall goal of the cash infusion is to get people to spend and consume and investment-type spending is much more desirable over something that is a "one shot" deal. Businesses in particular are eyed and watched when it comes to taxes. Tax cuts are designed to get people to expand and hire. However, some businesses will just store and hold the money to build up their stock of cash. Such behavior is not the goal of the tax cuts, for obvious reasons. Even so, businesses might be hesitant to spend and invest when the economic outlook is less than stellar (Samwick, 2016).

Regardless, more spending typically means more demand and that is often the entire reason why the tax cuts are done in the first place. Government spending is seen as another way, albeit inferior, to do the same thing. After all, the building of roads and bridges incurs demand but that money is typically coming from taxpayers and finding the necessary funds without incurring debt or raising taxes can be a challenge. This is precisely Keynesian spending is often criticized in comparison to private sector endeavors. Even so, increasing demand in any way is typically a good thing. The more spending there is, the higher the gross domestic product (GDP) typically is and the same is typically seen with employment. More spending at stores due to tax refunds or cuts means more people needed to man the registers and stock the shelves. More spending on roads means the construction workers will have more money that they spend on meals, groceries and other things (IMF, 2014).

Anyhow, the question still remains how the reserve ratio should be used when expansionary economic times are the goal. Generally speaking, the reserve ratio is lowered, rather than raised, when expansion is the desired outcome. In other words, the amount of money that the bank has to keep on hand to cover withdrawals and money due is lowered when expansion is the goal. Put another way, the bank leverages the money it has and uses it to create more money and in all ways possible. Of course, there is a risk to this and banks are not required to deviate from the previous ratios if they do not wish to. However, banks that are allowed to be more aggressive will do so. The caution is to make sure that a repeat of the housing financial crisis is not allowed for. Indeed, the money involved with that kerfuffle was rather "funny" and there was eventually such a lack of substance to the money and loans that were outstanding that the recession starting in 2007 caused everything to tumble down. Even so, ancillary and related regulations in the mortgage and other industries can be used as a means to keep loans and securities solvent and in the proper forms. The other side of that coin is that lowering the ratio tends to increase the money supply that is moving around within the system (Ohanian, 2011).

As for the discount rate, this is something that is regulated and used by the Federal Reserve to keep things at the proper growth rates and degree of stability. When economic growth is a little unbridled and out of control, the discount rate is typically raised. If the idea is to get growth going, the rate is usually lowered. The lower the rate, the cheaper it is to borrow money. A related way that rates are an issue is when government securities are being sold. An example would be bonds related to the federal debt. If economic times are good, the rate of return on government securities will not be as good as it would be if things are a little more tepid. Indeed, getting people to invest money can sometimes require a sweetening of the rate so that more people participate and put their money into the proverbial pot (Investopedia, 2017).

There are risks that come with infusing too much cash into the system. One major example if inflation. A modest amount of inflation is alright and can even be desirable. However, it needs to happen at a slow and consistent rate over time. Inflation, of course, is when the purchasing amount of money slowly decreases. This is precisely why things like gas and food were cheaper, in terms of actual dollar amount (or "real" dollars") a generation ago as compared to now. That happenstance alone does not mean anything is wrong. Indeed, a two-liter bottle of soda that used to be a dollar in normal instances is now going to be $1.50 or more. However, what should be avoided at all costs is deflation (the opposite) or excessive inflation. In extreme inflation cases, money goes from being able to meet basic needs to being basically worthless overnight. Venezuela is undergoing this sort of thing right now. Sloppy and desperate governments that keep printing money to meet the ends of their spending and that of their people end up devaluing what the money is worth and thus creates a bigger problem (Miroff, 2017).

The point to be made is that changes like increased government spending need to be done carefully. The changes need to be done incrementally and via a method that is as targeted and as specific as possible. If the idea is to keep (or get) money into the hands of regular consumers, then an income tax credit or cut would be the goal. If the idea is to get businesses investing and hiring, then a business-specific tax boon should be done. If the idea is a little of both, then a blend can be done, much like was done in 2009 or so. The line between regular taxpayers and business owners can be shades of gray in many situations and economies. As such, being able to target the right people with fiscal policy can be difficult at times. Beyond that, there are times when the "usual" way of doing things and spurring growth can be ineffective or at least muted. As noted before, the Great Recession ostensibly ended in 2009 but the economic growth rates since then, while positive, have been rather low. On top of that, the discount and lending rates have been kept rather low for that entire time and the reaction from the market has been much smaller and more minute than what would normally be seen. It is to the extent that some have actively opined what else can be done given that the usual tools and methods are basically exhausted and the economy is still very much in low gear. The election of Donald Trump, a man with very different ideas and political motives, will certainly change things. However, the question becomes whether those changes will be good or bad (Liesman, 2017).

Even with the chaos and unpredictability of the Great Recession and what has happened since then, the tools and tricks noted above are still the best practices. Generally speaking, the government will tend to spend and act more during expansionary economic plans and times and they will tend to back off and let the market work when times are better. Allowing the private sector to operate and thrive is always going to be superior to the government spending money to accomplish the same thing. However, there are times when the government spending and acting is necessary so as to calm the market, incur people to reinvest and expand and otherwise improve the economic fortunes of the people.