Luisa McGarvey Period: 4 2-2-14 Economics essay

The current state of the economy is slowly improving from the economic collapse of 2008 but it still has a ways to go. The current rate of Gross Domestic Product (GDP) growth is 3.2 percent, which fits right into the ideal rate of GDP growth, 2 to 3 percent(News Release: Gross Domestic Product). The percent of unemployment and rate of inflation are dependent on each other so as the percent of unemployment decreases, the rate on inflation increases making it difficult to find a good balance between the two. Unemployment in the US is still pretty high and must be reduced, but it has decreased from 7.9 percent in January 2013 to 6.7 percent in December 2013(CES News Releases). The current rate of inflation is at 1.5%, however and acceptable rate can be as high as 3% which leaves the room for the rate of inflation to grow allowing unemployment to decrease(US Inflation Calculator, Altig, David). One of the most pressing issues regarding the state of our economy is the national debt which is over 17 trillion dollars and is increasing by 2.43 million a day(U.S. National Debt Clock). To help improve the slow growing economy the United States government should change its fiscal policy by raising taxes and decreasing government spending and should alter its monetary policy by leaving the Reserve Requirement (RR) and interest rates unchanged while buying more T-bills. The United States government should raise taxes slowly over the years to start to get rid of the huge national debt and to boost the economy in the long run. If the US government does not begin to take measures to decrease the 17 trillion dollar debt it will get even more out of hand leading to higher interest rates and another economic collapse

in the future. One of the problems with getting people to take action on the national debt is that the consequences are not immediate leading people to believe it is not a pressing issue(National Debt FAQFrequently Asked Questions). Although cutting taxes may provide a little relief and decrease the percent of unemployment slightly, the growing national debt is getting out of hand causing it to be a more pressing issue. Tax cuts have not been proven to provide revenue for the government and there has been no evidence that the 2001 and 2003 tax cuts caused any economic growth and they did not pay for themselves as promised(Center on Budget and Policy Priorities). During a recession tax cuts can help stimulate the economy a little bit but our economy has improved from the economic collapse of 2008 and is no longer in a recession so tax cuts are no longer necessary. Another downside to cutting taxes is that is lowers national savings which doesn't allow the government to do its job. In 1990 and 1993 congress marginally raised income taxes on the wealthy and the economy continued to grow at the same rate as in the 1980s after a large tax cut(Center on Budget and Policy Priorities). During Clinton's presidency he raised taxes and the economy surged with unemployment falling from 6.8 to 3.9 percent and house prices rose 4.7 percent from 2.4 percent(Bill Clinton Takes Credit for "flowering" of Economy in 1990s). If taxes were raised by the government at a set rate slowly over the years it would help decrease the growing deficit and boost the economy which leads to less unemployment. To help eradicate the immense national debt the United States government should decrease its spending. To prevent another economic collapse and increased interest rates steps to eliminate the national debt must begin now. There are many things the United States can not stop funding such as Medicare, Medicaid, safety net programs, social

security, education, etc, however the US could make cuts on the Defense Budget. The Pentagon had a budget of 530 billion dollars in 2013 which doesn't even include war funding which can exceed 100 billion dollars, Homeland Securities budget of 35.5 billion dollars, the funding of nuclear weapons which was 11.5 billion the international affairs budget of 8 billion dollars, or defense related activities budget of 8 billion dollars(How Much Does Washington Spend on 'Defense). The defense budget already takes up 20% of the federal budget and with the majority of American troops being pulled out of Iraq and Afghanistan there is less need for Defense funding which could be put to better use by beginning the long process of paying off the countrys national debt. The United States should adapt its monetary policy by leaving the Reserve Requirement (RR) and interest rates the way they are and start buying more T-bills to stimulate the economy. The Reserve Requirement should remain as is because it is a very powerful and unpredictable tool of the Federal Reserve Bank (Fed). When the reserve requirement is decreased the economy would surge but it would lead to a vast increase in inflation and if the banks loaned out too much it could cause them to shut down. The Federal Reserve Requirement is used infrequently and it should remain that way due to huge impact it can have on the economy(Federal Reserve: Press Release). Interest rates have been decreasing since 1982 and are currently quite low making it easier for people to take out loans which boost the economy(When Will U.S. Interest Rates Rise). Since low interest rates stimulate the economy and lessen unemployment the low interest rates should remain constant. When the government buys a T-bill it is putting more money into the economy which increases the money supply which leads to a surge in the economy and more jobs being created. The United States Government should reduce the number of

T-bills it sells which slows the economy and should attempt to buy more T-bills to put more money back into the economy. T-bills are the weakest yet most controllable Fed tool which allows one to predict the outcome of more easily. To continue to aid the improving economy the United States government should should change its fiscal policy by raising taxes and decreasing government spending and should alter its monetary policy by leaving the Reserve Requirement (RR) and interest rates constant while buying more T-bills. This solution will help boost the economy by providing more jobs without letting the inflation rate get too high. This solution also focuses on the elimination of the national debt as a pressing issue. Many republicans would not be in support of this proposal as it is suggesting and increase in taxes and a decrease in defense funding. If this plan were proposed if would be more popular among democrats who are in favor of cutting spending on national defense. In conclusion, there is no simple way to improve the Unites States economy because there are so many factors to juggle.

Works Cited Altig, David. "What Is the Right Inflation Rate." Federal Reserve Bank of Cleveland. N.p., n.d. Web. 01 Feb. 2014.

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