Understanding Economic Policies

Policy Interventions

The US follows a mostly Keynesian view of economics. This view is steeped in the belief that policy can guide economy growth. There are a variety of policies used to achieve this end such as stimulus packages, interest rates, raising or lowering taxes, and free trade policies. These policy interventions have proven to assist in changing economic outcomes for the macro economy, but their impact on quality of life is controversial (Hubbard & O’Brian, 2010).

Stimulus Packages

Stimulus packages are a controversial method of stimulating the economy. The government implements stimulus programs into the economy in order to stimulate spending or production (Hubbard & O’Brian, 2010). This can be done in a variety of ways such as construction projects and other spending (Hubbard & O’Brian, 2010). This stimulus keeps the economy from stagnating, but has the negative impact of raising debt. For this reason, stimulus packages are often used when the economy starts moving into recession or high inflation. This can have the positive impact of maintaining the standard of living and improving it in the short term but it can also reduce the standard of living if the debt becomes too large. Stimulus packages have not impacted my life, but I do believe they are necessary for maintaining a healthy economy.

Interest Rates

Interest rates are the most commonly used policy for creating economic growth and balancing inflation and deflation. Interest rate accomplishes this task by balancing the business cycle through the control of money in circulation (O’Sullivan and Sheffrin, 2003). When there is too much money in circulation, this has the negative impact of causing prices to escalate due to the loss of value in the dollar (O’Sullivan and Sheffrin, 2003). Lower interest rates increase consumer confidence and increased purchasing. As a result, there is more employment and trade. Ultimately, low interest rates have positively impacted the economy by increasing corporate spending and increasing employment. However, if interest rates remain low for too long, this can devalue the dollar making it less appealing to invest. In order to improve quality of life, interest rates must be used to strike a balance between inflation and deflation. Interest rates improve my quality of live when they are low because I can make larger purchases such as a car.

Taxes

Taxes work similar to interest rate policies as they stimulate spending. Reducing taxes creates more individual income and this is intended to increase spending (Hubbard & O’Brian, 2010). Taxes also serve a major function in controlling competitive pricing and maintaining balance in the economy. Great Depression is an example of how lack of taxes created a situation where the economy was in a downward spiral for a long time. The Great Depression began in 1929 but its causes were deeply rooted in the affluence of the 1920s (Hubbard & O’Brian, 2010). The unregulated growth of entrepreneurship and industries fueled the depression. Prior to the 1930s, there were no income taxes, fiscal or monetary policies and industry and entrepreneurship could flourish with little regulation (Hubbard & O’Brian, 2010). This ability ultimately led to overproduction and lack of demand which would ultimately stagnate business growth in the US until the advent of WWII (Hubbard & O’Brian, 2010).

As an example, imagine owning a bakery and the ability to produce pies is only limited by competition. This unregulated are creates a situation in which companies can only compete on price and prices are reduced to the point of where it is almost impossible to make money from the pies sold. This factor increases the supply but reduces the demand and price further which is what took place in the depression (Hubbard & O’Brian, 2010). So, while high taxes reduce quality of life so to can unregulated growth without taxes. While lower taxes appear to benefit my quality of life by having more income, I do realize the necessity for them.

Free Trade Agreements

Free trade is a controversial area because opening trade barriers can stimulate growth but it can also be harmful depending on the situation. Expanding trade agreements such as the Transatlantic Trade and Investment Partnership have been proposed and engaged in since the 1990s (Hubbard & O’Brian, 2010). These agreements were supposed to expand American business (which they have) but they have also reduced jobs in the US such as manufacturing. These trade agreements present a complex economic situation because superficially they appear to benefit everyone, or that they hurt the largest partners in the agreement. The real problem with these agreements is that they are not creating growth domestically for companies at least in the short term. It may be that the benefits of these agreements are realized in the long run. It is unsure as to the benefit of these agreements because they have reduced American industry and jobs but at the same time reduced the cost of goods (Hubbard & O’Brian, 2010). This point is arguable also because, the quality of goods can be said to be inferior to the goods produced prior to these agreements (Hubbard & O’Brian, 2010). The debate over the impacts of trade on quality of life continue to be debated. I personally do not feel that the current trade agreements in place were well-thought out as many of the members of my family have lost higher paying jobs due to offshoring. These trade agreements have been harmful to my quality of life. I believe that these agreements need to be rethought and made more balanced.

References

Hubbard, R., & O’Brian, A. (2010). Economics. (3, Ed.) Boston, MA: Pearson Hall.