THE ROLE OF THE GOVERNMENT AND THE ECONOMY1
The Role of the Government in the Economy
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The Role of the Government in the Economy
More powerfully than ever, governments worldwide have been exerting their fiscal might to influence economies. They have at their disposal fiscal policy, consisting of the ability to tax and the ability to spend, both of which can promote growth of economies and/or reduce poverty. Fiscal policy can be seen at work in the actions of the president and Congress, the Federal Reserve, and how policies created and enacted affect the --- organization domestically and internationally.
Presidential and Congressional Economic Stimulus
There are many things the president and Congress can do to stimulate the economy. First, although it sounds counterintuitive, they initiate policies to increase government spending. Money is spent predominantly in areas that are untouched by public markets—services, for example, that the citizenry would not pay for. These include military defense, contract enforcement, and police services(Stratmann, 2010). This type of stimulus spending is supported by Keynesian economic theory, which holds that when an economy is in a slump and unemployment is high, governments must spend money to create jobs and move capital that has perhaps been underutilized. “Keynes’ theory has been one of the implicit rationales for the current federal stimulus spending: it is needed to boost economic output and promote growth” (Stratmann, 2010).
Another way the president and Congress can assist a struggling economy is by cutting taxes. Proponents of tax cuts see their value in that cutting taxes boosts the economy by encouraging spending(Horton, 2012). When people’s paychecks are padded with the extra dollars here and there that would otherwise have gone to taxes, they do not necessarily mind spending a few extra for an evening out, or rewarding themselves with that new pair of shoes.
Presidential and Congressional Economic Contraction
Just as policies that initiate spending and tax cuts stimulate the economy, those that initiate the reverse have the opposite effect. The president and Congress can contract the economy by reducing spending or raising taxes. Both of these are often necessities after a successful stimulus initiative, as they are difficult to halt(Horton, 2012).
The Federal Reserve and Economic Stimulus and Contraction
The Federal Reserve is also a party to stimulating and contracting the economy. It influences the level of prices and output in the short term, and contributes to financial stability by cushioning financial disruptions and preventing their spread. If something occurs to threaten financial markets, the Federal Reserve can absorb the impact by “aggressively and visibly providing liquidity through open market operations or discount window lending” (Federalreserve.gov, n.d.).
Two particular factors that it controls in its stimulus and contraction of the economy are inflation rates and interest rates. These are two economic indicators that reflect the strength of the economy, with a low and stable inflation rate, for instance, a necessity for keeping the economy strong. The Reserve’s manipulation of each can adjust the economy accordingly (Federal Reserve Bank of San Francisco, 2006).
Policymakers and Economic Stimulus or Contraction
Policymakers are motivated to stimulate or contract the economy by the goals of their organization. These goals, first and foremost, are the economic safeguarding of the government and nation of the United States(Federalreserve.gov, n.d.). This involves striking a careful balance between stimulus and contraction of the economy. There are often, as well, specific events that motivate policymakers to formulate policy and make decisions concerning the economy. Examples might be an act of terrorism, a natural disaster, or a military conflict.
Policy Goals of the Federal Reserve
Based on policy information published by the Federal Reserve, its goals include the objective "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates"(Federalreserve.gov, n.d.). In order to accomplish these goals, the Federal Reserve must achieve price stabilization, which leads to maximum employment and moderate interest rates (Federalreserve.gov, n.d.).
The Federal Reserve and the Strength of the Economy
Inflation and interest rates are indicators for the Federal Reserve of the strength of the economy. Prices that rapidly rise, for instance, indicate an economy that is damaged and out of balance. Maintaining a stable inflation rate allows governments to strengthen their economies by ensuring that monetary policies are able to contribute to rising living standards for all(Federal Reserve Bank of San Francisco, 2006).
Interest rates are variables that impact all economic segments, influencing decisions such as whether to make a simple purchase on credit or a major one, such as an automobile or home purchase. Rising interest rates impact the cost of borrowing, which can hurt first-time home buyers and those with adjustable rate loans (Metcalf, 2015). Falling interest rates makes borrowing more affordable, but means that individuals and businesses are likely to increase their debt. For the Federal Reserve, lower interest rates are generally an indication of a struggling economy. Lowering interest rates, in fact, is one of the first things the Federal Reserve will do to assist such an economy, as it “stimulates the housing sector, which is critical for national economic growth. In fact, if the economy is weak or in a recession, the Fed's policy is to cut interest rates to stimulate growth” (Metcalf, 2015).
Nike and Global Economies and Supply Chain Changes
The Nike organization, based in over 50 countries and 800 factories, has not been affected adversely by various fluxes in global economies. As it is so diversified, Nike reports that it is able to continue to grow and operate successfully even when economies in different areas are strained (McCalla, 2014). Nike discovered that its product had become immensely popular in China with the youth culture, with sales increasing nearly 30 percent each year. Because of this, Nike altered its shipping and distribution centers in order for China to achieve more efficient and timely deliveries, enhancing the sales experience for Chinese nationals. They expect sales to continue to rise due to the enhancements made (McCalla, 2014).
Conclusion
Many parties are responsible for the stimulus and contraction of a nation’s economy, both of which keep the economy strong. The president, Congress, and the Federal Reserve all play vital roles in ensuring that economies remain stable and in balance. Through looking at how each asserts their ability to do so, a clearer understanding of fiscal policy and responsibility can be gained.
References
Federal Reserve Bank of San Francisco. (2006, March). How does inflation affect economies? Retrieved from
Federalreserve.gov. (n.d.). Monetary policy and the economy. In The Federal reserve system: Purposes and functions (pp. 1-25). Washington, D.C. : Board of Governors of the Federal Reserve System, 1994. doi:
Horton, M. (2012, March 28). Fiscal policy: Taking and giving away. Retrieved from
McCalla, J. (2014). How economics affects Nike. Retrieved from
Metcalf, T. (2015). How do interest rates affect the economy? Retrieved from
Stratmann, T. (2010, June 10). Does government spending affect economic growth? Retrieved from