Economics

Currently the US economy is coming out of the most severe recession since the Great Depression and to fix it the economy needs as much help as it can possibly get. Both monetary and fiscal policies will need to be drawn in.

Investment in the economy has fallen by more than a quarter in the recession and an extended monetary policy that lowers interest rates will give confidence to firms to increase investment. It will also help increase spending as people can borrow at lower interest rates. Given that the current target Federal Funds Rate is 0-0.25 percent, the options for the Federal Government to choose are more open market operations and a more direct involvement in the financial market by providing lines of credit and short-term debt.

The economy also needs direct stimulus from the government since monetary policy can only provide incentives to businesses and households to spend, not actually increase spending. If the government decides to increase spending that will directly contribute towards increasing aggregate demand. Higher aggregate demand in turn will help increase our real GDP. Fiscal stimulus is more important today because it has been shown that monetary policy is not as effective as a tool in stimulating growth as fiscal policy can be.

The government should not raise the taxes in the short run since it will hurt the spending power and confidence of the people, but should put forward a convincing plan to raise taxes in the medium-to-long run to offset the deficit. While in the short run it is important to raise real GDP using any possible means we cannot lose track of the future since anything that we are borrowing today has to be paid back at some date looking forward.

In summary, we need a policy that helps kick-start growth in aggregate demand and helps pull the economy out of the recession. It is not something that can be done with one single policy and needs a versatile approach with every agency pitching in.