Why The National Economy Matters Economics Essay

The economic wellness of a state impacts its societal order, criterion of life, political stableness, single freedom, and its national security. The strength of a national economic system determines how much it can back up physical substructure such as roads, every bit good as societal demands such as wellness attention and instruction. Economic policy is the attack authoritiess use to excite or pull strings the economic system to accomplish specific ends. Common ends of economic policy are high employment, positive growing, and stable and balanced monetary values ( Friedman, 1 ) . The economic policy of a state can determine non merely the type of economic system it will hold, but besides the degree of economic and political freedom its people will hold.

Governments can act upon their national economic systems through pecuniary policy, financial policy, and regulative policy ( Economic Policy ) . Monetary policy is the authorities ‘s control of the money supply and the sum of money in circulation. A big sum of money in circulation can take down the value of the dollar and cause lifting monetary values, or rising prices ( Mankiw, 667-668 ) . A smaller money supply can take down monetary values and productiveness and do a recession. Control of the cardinal money supply can besides be used to raise or lower involvement rates, which can be used to promote people to borrow and pass when rates are low or to deter this activity with higher rates to forestall rising prices.

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Fiscal policy guides the authorities ‘s ability to raise money and pass it. Governments can raise money chiefly through revenue enhancement of income and trade and through adoption. These revenue enhancements are used for societal entitlement plans, national defence, and to refund borrowed financess. Governments cut revenue enhancements to increase disbursement by the populace and raise revenue enhancements to command consumer disbursement and cut down rising prices ( Friedman, 2 ) . Less frequently, they may cut authorities disbursement to assist cut down rising prices.

Regulatory policy includes Torahs that regulate concern and industry, trade, and labour. Rules and ordinances that provide protection for the populace and the environment can besides act upon the economic system by increasing production costs for concerns to run into extra pollution control and safety regulations ( Mankiw, 209-210 ) . They can besides raise monetary values by restricting where concerns can run or obtain natural resources.

Economists, political parties, the private sector, and the public differ in sentiment on how and when these types of policies should be used. This argument on the function of the authorities in pull offing the economic system is a long 1 that is strongest in democratic states such as the United States, where the construct of a free market is balanced with the economic wellness of the state and its citizens ( Kendrick, 387 ) .

II. Foundation of U.S. Economic Policy

The American Revolution has its roots in economic freedom. Many historiographers province that the settlers were chiefly motivated to derive independency from the British for economic grounds ( Edwards ) . The British settlements in America were operated under a mercantilist system in which the settlements were viewed as a beginning of resources to be exploited for edifice wealth. The increasing revenue enhancement and limitations on trade imposed on the settlements by the British sparked unrest. The desire of the settlers for economic independency grew stronger and finally led to the Revolution.

These colonial ideals of economic freedom were based on the Hagiographas of the Enlightenment minds such as Adam Smith and John Locke. Adam Smith was a Scots economic expert whose thoughts originally emerged during the Enlightenment epoch. He promoted the thought of economic ego involvement with small authorities intercession. As the writer of The Wealth of Nations, he was among the first to progress the construct of laissez-faire, which translates as “ let to make ” in French ( Mankiw, 150 ) .

As a classical economic expert, Adam Smith supported the people and their single freedoms which included their economic involvements. Smith thought the authorities should non be straight involved in economic pattern, such as the ordinance of the economic system through issuing duties, prefering monopolies, and commanding colonial trade ( Mankiw, 379 ) . Smith saw a limited function for authorities to supply instruction, national security, and basic substructure such as roads.

Smith was against the monopolies of mercantile system. Smith saw mercantile system as harmful to a state ‘s ability to make its economic potency. He noted that the manufacturer demands were put above the consumer demands in a mercantile economic system. Under Smith ‘s individualistic theory, the economic system should be driven by ingestion ( Mankiw, 154 ) . He promoted the construct of general public consumers by promoting persons to take portion in their ain economic outputs. He said the economic system would turn if the consumers took their concern to the free market where concern proprietors and manufacturers would hold to vie for their concern. Once this alteration happens, wealth and income will follow for the state. Smith besides felt that society would take attention of the needy without being forced to by the authorities. This was his unseeable manus theory that people would of course make the right thing.

Adam Smith ‘s vision was for a society where single capitalist economy was allowed to turn and authorities took a supporting and non commanding function in the procedure. His individualistic doctrine encouraged mean citizens to take part in economic activity to go more comfortable and better their economic status. He believed that it was a basic natural right of adult male to be able to command his ain productiveness and be self-sufficing.

Following the American Revolution, the Establishing Fathers continued to prefer a limited authorities and a balanced budget. The state ‘s first Secretary of the Treasury, Alexander Hamilton, wanted to guarantee that the United States paid its debts on clip and did non allow them roll up. In his position, this was necessary so the state would hold the good recognition to borrow in times of greatest demand such as war. However, Hamilton besides advocated the start of a national revenue enhancement system and the creative activity of war bonds to cover the debt from the Revolution. Elected as the 3rd President of the United States, Thomas Jefferson was a strong protagonist of balanced budgets to maintain the authorities from turning excessively big ( Samuelson ) . Jefferson made the Louisiana Purchase with $ 15 million in hard currency. Under his presidential term, the national debt was reduced and the figure of federal employees was cut ( Miller Center ) .

The thoughts of Adam Smith and other individualistic philosophers influenced the limited function of the United States authorities in the economic system from the Revolution into the early 20th century. However, several international and domestic events of the 20th century caused a displacement in attitudes about the function of authorities in the domestic economic system. The first event was World War I, which raised federal disbursement on the military and equipment, increased the figure of workers as more people the farms to assist production, and led to higher rewards ( Rockoff ) . The authorities besides had to borrow money and raise revenue enhancements to assist pay for the war attempt. The Great Depression hit less than a decennary subsequently and the state faced record unemployment, neglecting Bankss, and widespread poorness. The federal authorities took its most active function in economic policy and ordinance, with bureaus created to command the economic, societal, and physical resources of the state. While the state was still drawing out of the Depression, World War II created a new demand for labour and production to back up the war attempt. The usage of rationing, turning shortages, and tighter authorities control of all resources were introduced countrywide. In the decennaries of the Cold War that followed the Second World War, the United States escalated military and international assistance disbursement in its race with the Soviet Union. Although all U.S. presidents have used economic policy at some degree to act upon national economic conditions, major policy displacements can be identified during the presidential footings of both Democrats and Republicans get downing in the 20th century and go oning until today ( Shreve ) . These Presidents include Wilson, Roosevelt, Kennedy, Johnson, Nixon, Carter, Reagan, Clinton, and Obama.

III. Major Shifts in Domestic Economic Policy

Elected in 1912, President Woodrow Wilson took a more active stance toward economic policy than earlier presidents ( Miller Center ) . He had an aggressive New Freedom docket and acted rapidly to get down an income revenue enhancement under the late passed Sixteenth Amendment. As a Democrat, Wilson did non swear the free market wholly and felt the people needed governmental protection. He besides looked to the European states as theoretical accounts for economic ordinance. During World War I, the authorities relied on adoption and revenue enhancements to fund the war. Many new bureaus were created to supervise disbursement, set monetary values, and modulate the economic system, such as the Food Administration, the Fuel Administration, the Railroad Administration and the War Industries Board ( Rockoff ) . Although most of these bureaus were eliminated when the War ended, Wilson ‘s economic policy was a major alteration in way from old American presidents. His creative activity of new bureaus with economic functions in a clip of crisis would be copied by Roosevelt in the Great Depression. World War I besides created new issues and duties for the United States authorities including veteran ‘s benefits and the payment of the immense war debt. One of Wilson ‘s long-run economic impacts was the formation of the Federal Reserve Board in 1913 to modulate the money and banking system.

Franklin Delano Roosevelt ( FDR ) took office as President in 1935, in the center of the state ‘s worst economic crisis. Roosevelt ‘s New Deal program to convey the state out of the Great Depression was a extremist displacement in U.S. domestic economic policy. It placed the federal authorities at the centre of straight pull offing the national economic system and created a cardinal bank after taking the United States off the gilded criterion ( Shreve ) . FDR besides pushed through statute law to modulate the fiscal sector such as the Securities Act that formed the Securities and Exchange Commission to supervise the stock market and the Federal Deposit Insurance Corporation to do personal bank histories more secure. He besides created legion bureaus to supply occupations for the unemployed such as the Civilian Conservation Corps, the Works Progress Administration, and the National Recovery Administration. These bureaus used authorities stimulation undertakings to make occupations constructing roads, Parkss, and other public installations. The economic experiences during the War would besides take to the creative activity of the Council of Economic Advisors in 1946 by President Harry Truman, who took office when FDR died in 1945. Federal disbursement under Roosevelt grew from $ 6.4 billion in 1935 to $ 55.2 billion by his last twelvemonth in office in 1946 ( Peters ) .

With the exclusion of World War I and the Great Depression, for about 200 old ages the United States authorities had operated on the general construct of equilibrating budgets, restricting authorities engagement in the economic system, and maintaining rising prices depression. When John F. Kennedy ( JFK ) was elected President in 1960, he faced a recession with high unemployment and a big figure of concerns traveling insolvent. Kennedy brought in a squad of economic advisers who were followings of the economic expert John Maynard Keynes ( Samuelson ) . In 1936, Keynes wrote the General Theory of Employment, Interest and Money that outlines his theory of close authorities engagement in pecuniary and financial policy. They introduced the Keynesian attack with more shortage disbursement as a tool to hike the economic system. Keynes and his followings believed that financial policy was a more powerful tool than pecuniary policy to travel the economic system out of a recession. Keynes focused on utilizing higher authorities disbursement to replace for private sector disbursement ( Samuelson ) . These economic experts believed that as the private sector spends less, the authorities should step in and pass more to make market demand ( Miron, 6 ) . The Keynesians were non every bit concerned about the money supply and thought more money in circulation was better. However, this attack created a higher hazard of rising prices and a lower value of the dollar.

Following the Keynesian advice, Kennedy worked to raise the minimal pay and increased disbursement on societal, instruction, medical, military, and lodging plans. He besides created new plans and bureaus to assist promote mass theodolite, redevelop metropoliss, and better the conditions in rural Appalachia. Kennedy did, nevertheless, besides try to cut revenue enhancements to increase single and concern disbursement. Federal disbursement under JKF totaled $ 111.3 billion in his first twelvemonth in office and grew to $ 118.5 before his term as President ended in calamity when he was assassinated ( Peters ) .

Vice President Lyndon B. Johnson stepped into the office of President when JFK was assassinated in 1963. Almost instantly, Johnson started an ambitious plan called the Great Society that declared a national “ war on poorness ” and directed monolithic new disbursement on societal and economic undertakings ( Miller Center ) . He signed the Economic Opportunity Act in 1964 that created the Office of Economic Opportunity. Programs such as Head Start, the Job Corps, and Medicare were besides created under Johnson. However, funding for most of his planned societal undertakings had to be redirected to back up the Vietnam War ( Shreve ) . The War was unpopular and prevented his election of a 2nd term as President.

Although many of Johnson ‘s new federal disbursement plans continue today, the executive power shifted to the Republicans in the following election. Medicare would go one of the largest entitlement plans in the federal budget, bing $ 451 billion a twelvemonth by 2010 ( Nather ) . The costs of the Vietnam War raised the federal budget, as disbursement went from $ 118.2 billion in Johnson ‘s first twelvemonth to over $ 195 billion in the 1970 budget twelvemonth ( Peters ) .

Richard M. Nixon began his first term as President in 1969. The economic system was making good when Nixon started his term with really low unemployment ( Miller Center ) . However, monetary values were lifting and there was concern about rising prices. Nixon at first brought in Nobel-prize winning economic expert Milton J. Freidman for economic policy counsel. Unlike Keynes, Freidman emphasized the function of pecuniary policy in steering the economic system ( Freidman, 3 ) . His economic squad wanted to decelerate growing down by restricting the money supply. However, this would take clip to hold an consequence. Nixon was worried that a bad economic system might do him to lose the coming election, so he declared a national economic exigency in 1971 and proposed a New Economic Plan. Part of the motive for this was to increase his opportunities for re-election by bettering the economic system for electors ( Miller Center ) . The program was based on utilizing monetary value controls to maintain costs down on energy, rent, and rewards. Nixon had been against monetary value controls earlier, but found them to be helpful politically. These monetary value controls set in topographic point by Nixon were continued and even expanded under the following president, Democrat Jimmy Carter.

Nixon besides disagreed with his appointee to the Federal Reserve, Arthur Burns, over economic policy. As Chair, Burns forced Nixon to restrict federal disbursement and equilibrate the budget. When Nixon put rises on clasp for federal workers, the US Postal System went on work stoppage and the President had to temporarily utilize the Army to maintain service traveling. After Republicans lost Congressional seats in the election, Nixon found a new economic adviser and gave in to Democrat demands that authorities disbursement be increased, pay and monetary value freezings, and revenue enhancements cut. He besides proposed higher import revenue enhancements on foreign merchandises coming in to the United States and expanded Social Security, Medicare, and Medicaid.

Nixon ‘s New Economic Policy of 1971 was the antonym of the free market principals he had supported at foremost. The alterations produced short-run betterments in the economic system that were popular and he won reelection in 1972. The national economic system started to endure once more by 1973 after Arab states raised the monetary value of oil and created an trade stoppage against the United States because of its support for Israel. This led to fuel deficits and higher monetary values.

Nixon besides pushed more ordinance that wedged concern and industry. He created the Occupational Safety and Health Administration ( OSHA ) and the Environmental Protection Agency ( EPA ) . The Chair of the Council of Economic Advisors under Nixon stated that “ Probably more new ordinance was imposed on the economic system than in any other presidential term since the New Deal ” ( Miller Center ) . Federal disbursement under Nixon grew from $ 210.2 billion in 1971 to $ 332.3 billion in 1975 and a shortage of $ 53 billion ( Peters ) . This was besides the biggest budget shortage under a President since FDR had a shortage of about $ 55 billion in 1943.

Jimmy Carter entered office in 1977 in the center of a weak economic system. He instantly implemented Keynesian policies that grew the size of authorities and expanded the monetary value controls started under Nixon. He created the Department of Education and the Energy Department, two of the largest bureaucratisms in Washington today. He deregulated rail, hauling, and air to cut down transit costs. His dissensions with fellow Democrats in Congress caused them to barricade some of his public assistance plan. However, many of his economic policies that were implemented resulted in lifting involvement rates that reached every bit high as 20 % for personal and concern loans. His monetary value controls on energy contributed to fuel deficits and rationing. Many Americans remember the energy crisis as a major portion of his term as President. Under Carter, the federal budget reached a new record high of $ 678.2 billion by the 1981 budget twelvemonth. The shortage besides reached a new high of $ 79 billion by his 4th twelvemonth in office ( Peters ) .

Republican Ronald Reagan started his first term as President in 1981, following the economic jobs under Jimmy Carter. Reagan turned to Milton Freidman and, unlike Nixon, he followed his counsel. Friedman recognized that both pecuniary and financial policy had restrictions and that both should be used carefully ( Friedman, 5-7 ) . His book, A Monetary History of the United States, identified the root causes of the Great Depression as bad pecuniary policy. Freidman was the writer of the permanent-income theory and modern pecuniary economic sciences. Friedman ‘s research besides linked states with higher degrees of economic freedom as being more productive with higher incomes and less poorness. His research continues to hold a great influence on economic policy ( Bernanke ) .

Following Friedman ‘s advice, Reagan initiated disbursement cuts in societal plans, revenue enhancement cuts, reduced ordinance of concern, and decentalisation of some powers back to the provinces ( Miller Center ) . He besides removed the monetary value controls that had been put in topographic point under the Nixon and Carter disposals. This degree of cuts in societal disbursement and in the figure of federal employees had non been attempted since the authorities had rapidly grown under Roosevelt ‘s New Deal ( Kendrick, 1984 ) . His supply-side economic policies were labeled as Reaganomics by some. However, because his revenue enhancement cuts were accompanied by increased disbursement in some countries such as defence, the budget shortage grew larger. During his two footings, the federal disbursement degree grew from $ 746 billion in 1982 to $ 1,144 billion in 1989 ( Peters ) . Deficit disbursement besides doubled during this clip and reached $ 221 billion in 1986. A positive political development under President Reagan was the terminal of the Cold War, which would cut down the force per unit area to pass more on defence.

William J. Clinton took office as the President in 1993 in a period of economic recovery. He was a moderate Democrat who had to compromise with a bulk Republican Congress on a balanced budget and disbursement reforms. He cooperated with Congress in public assistance reform and raised the lower limit pay. Although he raised revenue enhancements in this first term in 1993, he went along with revenue enhancement cuts by Congress in 1997. New engineering and general international political stableness helped back up growing and productiveness. Interest rates and unemployment were low and economic growing created an addition in revenue enhancement grosss which helped extinguish the shortage. These alterations helped stabilise the economic system and the old ages of his two footings were economically stable overall.

The first effort at organizing a national wellness attention system was started in Clinton ‘s first term, but was rejected. Clinton besides created the National Economic Council as a cabinet commission in 1993. The federal disbursement degree continued to turn under Clinton ‘s two footings as President, from $ 1,462 billion in 1994 to $ 1,863 billion by the 2001 budget twelvemonth ( Peters ) . However, the understanding for a balanced budget resulted in a budget excess over his 2nd term.

Democrat Barack H. Obama began his term as President in 2009 at a clip of serious economic diminution that has been called the Great Recession. Obama and his advisers have adopted the Keynesian attack and have promoted a displacement to larger authorities, greater shortage disbursement, and increased adoption. Their policies besides include a trust on more authorities investing and the increased ordinance of the private sector. His disposal has besides taken greater control of extra sectors such as wellness attention, energy, and finance. Through the Affordable Care Act, Obama was able to go through the national wellness attention plan that Clinton had failed to make. This Act and his programs to raise revenue enhancements on wealthier Americans are projected to hold an tremendous economic impact ( Entin ) . This impact is non all positive and can take down worker rewards, decelerate the economic recovery, and lower grosss from revenue enhancements ( Prescott and Ohanian ) .

A higher revenue enhancement on the wealthy is a popular thought for many Americans and President Obama ‘s program for taxing the rich seems like a logical measure for many people ( Becker ) . However, economic expert D.W. MacKenzie of Carroll College points out that this policy will hold merely a little impact and could even do the job worse by cut downing revenue enhancement gross. He describes how the wealthy have moved out of European states where revenue enhancements have been raised on the wealthy. When revenue enhancements were raised to over 80 % in Great Britain in the 1880ss, many celebrated English millionaires including Ringo Starr, Michael Caine, David Bowie, Sting, and Sean Connery left the state to travel to states with lower rates such as Switzerland and Monaco. Recently when France raised its highest rate to 75 % , several celebrated wealthy citizens made public moves in protest. MacKenzie and many others propose that the best economic solution is to cut down disbursement and waste in authorities ( Fichtner and Debnam, 7-9 ) . The U.S. authorities spends about $ 4 trillion a twelvemonth, doing authorities disbursement degrees excessively high for revenue enhancement additions to even turn to at this point. Federal disbursement started at $ 1,294 billion in Obama ‘s first twelvemonth in office and is projected to turn to $ 4,532 billion by the terminal of his 2nd term in 2017 ( Peters ) .

IV. Current Challenges

The Fraser Institute publishes an one-year Economic Freedom of the World index. The construct of the study is based on economic expert Milton Friedman ‘s theory that states with higher degrees of economic freedom are more productive and have higher incomes and less poorness ( Gwartney, Hall and Lawson, 1-9 ) . The survey rates the degree that states support economic freedom through five steps: ( 1 ) size of authorities ; ( 2 ) legal system and belongings rights ; ( 3 ) sound money ; ( 4 ) freedom to merchandise internationally ; and ( 5 ) ordinance. In 2012, Hong Kong achieved the highest evaluation for economic freedom with a mark of 8.90 out of 10. The other states in the top 10 are: Singapore ( 8.69 ) ; New Zealand ( 8.36 ) ; Switzerland ( 8.24 ) ; Australia ( 7.97 ) ; Canada ( 7.97 ) ; Bahrain ( 7.94 ) ; Mauritius ( 7.90 ) ; Finland ( 7.88 ) ; and Chile ( 7.84 ) . Although the United States had been ranked in the top 10 for several decennaries, it fell to a new depression of 18th topographic point in 2012 with a mark of 7.69. This low ranking was due to higher disbursement by the federal authorities and more ordinances imposed on concern.

The national debt ceiling of the United States, or the sum the federal authorities can borrow, is now up to a record high of about $ 17 trillion ( Davies and Harrigan ) . When entitlements are included, the entire federal debt is really closer to $ 220 trillion ( MacKenzie ) . In 2012, the state ‘s gross national debt grew to the same degree as its gross domestic merchandise for the first clip of all time ( Davies and Harrigan ) . This current degree peers a debt of about $ 52,000 per citizen. However, this debt estimation does non include the $ 400 billion that would be owed merely in involvement each twelvemonth. Under the current debt, about 17 cents of every dollar is used to pay the involvement on the sum that has been borrowed so far. Within the following 10 old ages, this involvement payment will turn to 25 cents of every dollar.

Surveies have shown that a higher degree of debt slows the economic system and can forestall an economic recovery ( Fichter and Debnam, 9 ) . When a authorities must pay down higher degrees of debt, it can non put as much support for other activities and services. To maintain monetary values lower, the federal authorities must follow pecuniary and financial policies that keep involvement rates lower. Lower rates besides mean the investings and nest eggs of many workers do non lift in value and they must work longer before retiring. Data shows that between 2007 and 2010, the wealth of the mean American dropped by 40 % ( Davies and Harrigan ) . The larger national debt will besides make a physical demand for more money to utilize for refund. However, publishing more money to pay the debt can do rising prices, which consequences in higher monetary values for Americans. The higher debt degrees our state is making can non be sustained and at some point the authorities must cut disbursement on public plans ( Miron, 7-9 ) .

V. Conclusion

Presidents from both parties have influenced and changed the function of the federal authorities in the domestic economic system. As the authorities has taken a more active function in pull offing the economic system, the impact of pecuniary, financial, and regulative policy and normal free market forces is going harder to separate. Since the Great Recession and economic crisis of 2009, the United States has faced unprecedented economic jobs that have raised new argument on the inquiry of the function of authorities in economic policy. This argument is frequently based on political party association, with the Democrats run alonging up on the Keynesian side for more authorities intercession and the Republicans by and large alining with a limited, free market attack promoted by Friedman.

Political force per unit areas have contributed to restlessness of leading and the usage of speedy policy turns. Changes in economic policy are besides taking longer to hold an impact and are sometimes less effectual once they do. These short-run policies can conceal the existent issues and make unintended economic jobs in future old ages. As the national debt grows larger, it is critical that leaders from both parties put the demands of the state foremost and follow long-run economic policies that support a strong domestic economic system, a high criterion of life, single freedom, and our national security.


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