Fiscal policy and monetary policy in the us
Both fiscal and monetary policies are used as instruments of the state to influence the economy. It should be within consensus that the goals of these policies would be the steady growth of production that is in line with economic capacity and the labor force; zero inflation rate; high rate of capacity utilization and employment; and high trend growth of productivity and real GNP per worker (Tobin, 2002, par. 5). Generally, monetary policies are handled and implemented by the central bank while fiscal policies are handled by the national government. Monetary policy aids in economic influence by somehow controlling the amount of money circulating, and hence, directly affecting spending on goods and services. Fiscal policy, on the other hand, refers to the government’s use of budget to influence the economy. It also refers to tax cuts or additional taxes imposed; its spending, etcetera. This paper shall be a discussion of relevant fiscal and monetary policies in the US.
The US economy recorded a unified budget deficit of $248B in the year 2006, $70B lower than the recorded unified budget deficit in 2005. The 2006 budget deficit is tantamount to less than 2% of nominal GDP, significantly lower compared to 3.5% of the nominal GDP in 2004 (Board of Governors of the Federal Reserve System, 2007, p. 12). This slight improvement on budget deficit is complemented by the rising of nominal federal receipts by 11.75%, amounting to almost 18.5% of nominal GDP. This, again, is a significant increase compared to 16.25% of nominal GDP in 2004. Generally, the US economy records an improvement compared to its performance in the previous year. Federal receipts are also higher compared to previous years, though not higher compared to receipts in 2000. Expenditures, nevertheless, is higher compared to those in the previous years, though not higher than expenditures in 1994 (Board of Governors of the Federal Reserve System, 2007, p. 10). Federal government debt held by the public is lower compared to that held by the public in 1996, but higher than that in 2000 (Board of Governors of the Federal Reserve System, 2007, p. 13).
Given the present status of the US economy, the Treasury responded accordingly by paying down some Treasury bills and to a certain extent slightly trimmed the gross issuance of marketable Treasury coupons. Nevertheless, the Treasury also auctioned, for the first time since 2001, 30 year bonds, and would continually do so quarterly within 2007. It has been noted that treasury securities held by foreign investors, in spite of this auction, is slightly lower than that in 2005, meaning that there is a slight increase in the number of local investors who hold treasury securities. Interest rates, on the other hand, are higher by 0.5% in 2007 compared to that in 2006. Two-year and three-month interest rates of selected treasury securities are notably higher within 2006 and 2007 since 2003.
As regards the budget of the present fiscal year, it is $10.3B less than what is projected as needed for domestic discretionary programs. This means that the budget for education, veteran’s medical care, law enforcement, transportation, environmental protection, and medical research (Fiscal Policy Institute, 2006). Among many other concerns, this means that the pressure on social security and health benefit would continue to pursue; this also means that the expansion of Medicaid and other health insurances for poor families could not be granted; the intended plug in the shortfall in the State Children’s Health Insurance Program could not be attained; the component of Medicaid that insures health coverage for up to a year for families that are working their way off welfare would have to be on standstill; government funded medical research and scholarships for these researches will remain to be largely limited; and environmental protection would probably have to remain within the status quo. Aside from the cut on domestic discretionary programs, the tax cuts that mostly benefit high income households would cost the state at least $200B over the next five years. This would mean an increase in federal deficit by at least $256B over the next five years.
What does all of these statistics mean? We have noted that the treasury has paid down some treasury bills, have lessened the issuance of coupon securities but issued 30-year bonds. Such a monetary policy speaks of an expansionary fiscal policy. An expansionary fiscal policy generally is promulgated when the budget is in deficit. The same conclusion could also be garnered by the existing interest rates. An increased interest rate speaks of lesser money in circulation (a monetary policy function) that eventually results in higher interest rates for borrowers. This, again, is a result of government borrowing through bonds, which, fiscally, means that the government is in deficit. Such deficit is reflected in budget. An expansionary fiscal system results in tax cuts, as we have seen above. This also is the reason for spending cuts that puts pressure on domestic discretionary programs.
Board of Governors of the Federal Reserve System (2007). Monetary policy report to the Congress.
Fiscal Policy Institute. (2006). House budget calls for large cuts in domestic programs and would worsen deficit. Retrieved February 20, 2007 from http://www.fiscalpolicy.org/press_060331FederalBudget.stm.
Tobin, James. (2002). Monetary policy. Concise Encyclopedia of Economics.