Government Intervention in the Economy: Are Monetary and Fiscal Stimulus Policies Possible Tools for Getting an Economy Out of a Recession

Topics: Keynesian economics, Monetary policy, Great Depression Pages: 6 (2526 words) Published: November 15, 2010
Subject Area: Economics
Topic: Deficit Spending
Essential Question: Should the government use instruments of monetary and fiscal stimulus policies to reactivate the economy? Imagine people living in parks called Bushville’s, lines for soup kitchens that go for blocks, and all across the country kids running away from home travelling on trains searching for your next meal. This is just a taste of what 2009 could have been, but thankfully, the year did not go down this way although it will be remembered for global economic crises and change. For the first time in three decades, the United States was forced to leave its monetarist for m of economy and start to use Keynesian fiscal measures in order to try to revive its economy. Since then, deficit spending has been a newsworthy topic because as of October of last year the world’s economies entered a deep recession that has been described as the worst since the Great Depression of the 1939. Due to the failure of multiple financial institutions, the government was forced to intervene in the economy in the form of fiscal stimulus - deficit spending - and by early 2009, a “$787 billion stimulus plan signed by President Barack Obama” (Pesek) was passed by the senate. Newly elected President Barack Obama’s Chief Councilor of Economic Advisers, Adam Goolsbee said at a senate hearing early January of this year, I do not believe that over the next two years, we can make major deficit reduction or balancing the budget a goal, I think that would run the risk of repeating one of the mistakes of Herbert Hoover that led us into Depression (Pesek). Although there is an ongoing argument about the use of deficit spending, it has become clear after several catastrophic economic crises that governments should intervene in the form of both monetary and fiscal stimulus policies, since they are the quickest and most effective ways to jump-start the United States economy during a recession. Governments around the world must not find themselves blindly supporting pure capitalism during a recession, because government intervention is the key to reviving an economy. Pure capitalism prohibits government regulation of the economy. Instead, pure capitalism favors governments adapting “hands off” laissez-faire economic policies, which let the markets fluctuate naturally. In an ideal world where people are consistently and entirely honest this form of economy would work. Obviously, the world is not perfect, so when people are dishonest or perpetrate illegal deals market failure may result. Situations like this may require government to intervene and to set “the rules of the game” (McEachern 36). Deficit spending is one form of government intervention, and it is a very controversial form because of it involves the country taking on a great deal of debt – often owing the money to foreign powers. Nevertheless, economists around the world agree that [t]he experience from the Great Depression of the 1930s and Keynesian theory show that fiscal stimulus and deficit financing is the right recipe for getting . . . out of the recession (Vega). During recessions, governments must be willing to take action, even when these actions go against their core economic beliefs. Deficit spending is when a government spends more money than it is taking in. This money may come from different sources. It may come from the issuing of bonds or borrowing. Often the purpose of deficit spending is to stimulate a country’s economy. This form deficit spending is related to fiscal stimulus and monetary stimulus. The most controversial part of deficit spending as fiscal stimulus since it involves borrowing money. It is ironic that a country goes into debt in order to get out of an economic problem. This irony is what makes it such a controversial topic because the grandchildren of present day adults will be forced to pay back this debt. The purpose of fiscal stimulus, is to put more capital which is the building, equipment, and...
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