Government intervention and fiscal policy in the 2008 economic crisis

¶ … Revive the Economy

The United States today is facing a number of challenges, not least of which is the terrorist threat and political upheaval. One of the major internal problems the country is facing today is the economic downturn that started in 2008 and is still affecting the economy today. Economists have offered varied solutions, from tax cuts and rebates to a free market economy and the withdrawal of the government from spending regulation. Whichever solution is chosen, it is vital to recognize the importance of critical thinking in devising solutions to the economic problems and debt issues the country faces today.

Influences on Fiscal Policy

It is the opinion of several authors that the influence of Government and fiscal policy upon the economics within the country is somewhat disproportionate in terms of the natural economic rhythms of the population. In other words, government intervention in the economic realities in the country often leads to further deficits and further crises. The prolonged nature of the current economic situation, according to some, is a case in point.

Indeed, Reich (2011) believes that the current debate on the 2012 federal budget proposal takes the focus away from the issues that are of greatest importance in the economic crisis. The issues inherent in the debate include Republican questions regarding the President's spending cuts, whether these are sufficient to satisfy the Republican Party regarding the state of the American economy. Reich, however, argues that these are the incorrect issues to discuss at a time when these are not crucial for the healing of the current situation.

Indeed, Reich cites the 1995 budget debate involving Bill Clinton and Newt Gingrich, where the election was also a significant deciding factor in the direction of the debate. However, the author warns that the 1991 recession is not of the same nature or complexity as the one still experienced by many Americans. The current recession, for example, was caused by what Reich refers to as a "giant debt bubble," which will take more than a cut in interest rates to rectify. Indeed, interest rates, as Reich points out, have been close to zero for two years, making any effect by further cutting both unlikely and unviable.

The result of the crisis is a surplus of goods and cash as a result of the inability of average customers to buy goods and services. While the richest 10% of the population has experienced a revival of their personal economy, this is not enough to revive the entire economy.

Reich argues that insufficient federal spending is likely to deepening the crisis rather than remedy it. Indeed, the author reaches as far back as the Great Depression during the early 20th century in seeking analogies for the current crisis. Marks also focuses on this dark era in American history when searching for solutions. Both authors appear to agree on the fact that government intervention is the culprit in prolonging the crisis, especially with such intervention relating to spending cuts.

4. Potential Solutions

Economists and authors offer several alternative solutions to the current solutions suggested by the government and political debate. The current solution proposed by government is spending cuts. As mentioned, this may not be the optimal solution to the country's economic woes, since it is likely that this is likely to simply drive the country into further crisis. Instead, a solution should involve creating greater spending power among the general population so that businesses can once again sell their products and services at healthier levels.

One solution that has been used in the past is tax cuts and rebates. Reich (2011), for example, suggests that the overall economy of the country will only repair itself when the average American citizen has more money in his or her pocket. Reich's solution is by means of tax cuts, where the first $20,000 of income is exempt from payroll taxes.

Another tax-related solution is by means of temporary rebate payments. According to Taylor (2009, p. 3), this has been done in the past to create a sense of greater economic security among citizens, which was meant to encourage more spending among average citizens and hence help the economy back to its feet.

The inherent danger in this is that government funding to maintain these probate payments may diminish and eventually dry up, creating a further crisis rather than stimulating the economy. All solutions that relate to tax cuts create a potential problem for government, since taxes are a primary source of funding. Furthermore, the health of social and health care systems is also dependent upon the ability of the government and the taxes paid by citizens to maintain them. Hence, tax cuts and rebate payments can serve as no more than temporary, short-term solutions that should be carefully regulated by the economic needs of the government. A more self-sustaining method of economic revival should be created instead.

In terms of local business, authors such as Marks (2008) suggest a focus on free market principles, where the government's power is limited and the market regulates itself. This would create more opportunities for new entrants into markets, also creating more job opportunities and a better economic outlook in general.

The same principle applies to Herman and Smith's (2010) research, which focuses on the prevalence and success of businesses started by immigrants to the United States. The authors found that a significant number of immigrants during the 1990s as well as the start of the new century have started businesses themselves, or are involved in helping other businesses towards success. This, along with the general principles of a free market economy, could mean the answer to the current economic situation in the United States.

5. Recommendations.

The first recommendation I would make in this regard is to recruit the advice of economic experts. Such advice should then be critically considered before a decision is made about a way forward. More specifically, from the suggestions offered above, it might be advisable to use an immediate remedy such as tax solutions as a short-term response, while longer-term solutions could lie in encouraging a free market regulated by entrants such as immigrants and local entrepreneurs. This could then result in a truly self-sustaining growth factor for the economy, which would also mean more taxes and economic solutions for the government.