Fiscal Regulations of Labor Market - Essay Example

Labor Market The role of the American government goes far beyond the regulation of different industries, but also the management of general economic activity and stabilizing prices (Conte and Karr). The government uses two major tools to perform these roles. These tools include fiscal policy, which is the tool by which the government determines the necessary level of spending and taxes. The other tool is monetary policy, which is essential for the management of money supplies. However, inflation has been more difficult to address (Conte and Karr). Comparatively, the poor performance of the US economy to inflation displays a high fight against recession, which results in an increase in unemployment levels. This paper will review why the labor market is doing unfavorably, due to poor fiscal policy. Since the 1930s, the growth of the government was accompanied by an enlargement of government spending. In those years, government spending made up about 3.3% of the national GDP. By 1944, the figure rose to about 44% before it fell to 11.6% in 1948. In 1883, it stood at 24%, and it was lower than this figure at 21% in 1999 (Conte and Karr). This policy area entails fiscal policy, which entails the president’s proposal of a budget, which is split into different areas, including health, defense, transport and health services, among others. The main source of the funds allocated to the budget process is the tax collected from citizens, which approximated 48% of the federal revenues of the economy in 1999. Local government authorities collect their revenues from property taxes (Conte and Karr). During the 1930s, the US government was getting out of the Great Depression. Therefore, it began to employing the fiscal policy to pursue social policies or in supporting its affairs, and to promote economic stability and growth (Popper). During the 1930s, people lacked enough income to purchase all the outputs from the economy, which resulted to the reduction of prices and bankruptcy of companies. With the increase in the number of companies suffering from bankruptcy, more and more people lost employment, which lead to further failure of companies (Conte and Karr). During the 1960s, the government rechanneled funds into government spending programs, which pushed consumption beyond what could be produced by the economy. Soon, prices and wages increased in an acute manner ending with a situation of inflation. However, the government did not control the increasing inflation. Therefore, during the 1970s, the economy suffered from an acute rise in the prices of food and those of oil resources. As a result, the government resolved to contain the high inflation, through raising taxes and through the reduction of national spending. The strategies employed to contain inflation failed to be effective with inflation and unemployment rising to uncontrolled levels, which led to a situation referred as stagflation in which deficits characterized the US economy (Popper). During the 1980s, these deficits increased despite President Reagan’s use of programs that aimed at increase national spending and cutting tax levels. As of 1986, the deficit had escalated to USD 221,000 million, which was about 22 % percent of the total spending of the economy. The high deficits made the conception of tax policies or increased spending unthinkable policy strategies. Starting with the 1980s, reducing the deficit was the key outlook of the economy’s fiscal policy. The years that followed were characterized by the expansion of technology and trade with stimulation of economic growth appearing unnecessary. By 1998, the economy had changed to reflect a surplus, which led to fears that it would undergo major budget challenges (Conte and Karr). Despite the fact that the budget process was a very important process, the function of managing the American economy became very important. In general, it shifted from the outlook of fiscal policy towards monetary policy. For this role, the Federal Reserve System played a key role, in making monetary policy. The Fed uses three tools to control the supply of money that include the use of open market operations whereby it purchases government securities from businesses, banks, and persons. The effect of the strategy increases or reduces the money in circulation. The second tool is the Fed’s control of the reserves held by deposit-taking firms as deposits or vaults. The third tool is the discount rate, which are the interest rate levels offered by banks when securing credit from reserve banks (Conte and Carr). Currently, economists in America use different measures to evaluate whether monetary policy should be loosened or tightened. This is done through comparing the potential and the actual growth of the American economy. The potential of growth is perceived from the sum of labor force growth and increases in productivity per worker (Conte and Carr). During the late 1990s, growth in labor force was projected at 1 percent per annum, and worker productivity was expected to increase by 1.5%. Therefore, the level of potential growth was estimated at between 2 and 2.5%. The level indicated the danger of inflation that warranted the employment of tighter control of money (Conte and Karr). The second measure is the “non-accelerating inflation rate for unemployment” (NAIRU). In this regard, economists have discussed that inflation tends to increase with a reduction in joblessness. For example, during the decade of the 1990s, American economist held that NAIRU stood at about 6%, but during the years towards the end of the decade, it was considered to have reduced to 5.5% (Conte and Karr). A number of technological interventions seemed to make the American economy more productive, than it had been projected, during the 1990s. These technologies included satellite, the laser, the microprocessor, and fiber optics. The new technologies seemed to change the way of carrying out business and value creation in America (Schwartz). Following the major economic changes, the workers replaced by the uptake of new technologies found employment in the emerging occupations (Mankiw 75). The changes affected the outlook of the labor force because by mid-1999, the workers between the age of 16 and 64 years - who were willing to take employment but were not employed - increased to about 10 million (Schwartz). As a result, businesses showed a preference for early retirement in order for the older generation of workers can give way to the younger population. In the recent past, the US government has been spending more that it receives as revenues (Barro 37). This is evident from the debt at about USD 1 billion, which had been registered during the beginning of the 20th century. These deficits were mainly caused by the cycle of war, economic crises, and the surpluses registered during peaceful times (Barro 38). The efforts employed towards reducing the public debt include increasing taxation and reducing government spending. The unfavorable conditions arising from the inefficient fiscal policy include that a small amount is left available for the development of the current labor force, the creation of more employment has stalled – due to a reduction in government spending, and the wage levels offered to workers are continually affected adversely (Mankiw 75). Based on the abovementioned, the American government plays economic roles beyond the relation of different industries, but also engages in the oversight of the nation’s economic activities. Some of the policy and strategy outlooks employed are deployed to stabilize prices and reduce the amount of money in supply. The two major tools used by the government include fiscal policy, which entails the determination of government spending levels and the tax levels to be collected from citizens. The second tool is monetary policy, which entails the oversight of money supplies within the economy. Since the 1930s, government growth was accompanied by increases in government spending. Fiscal policy plays a key role in price stabilization because it is not only a tool used to increase economic stability, but also to control commodity prices. During the 1980s, programs intended at increasing national spending were employed because the deficit had increased to more than 220, 000 dollars. In complementing the role of the budgeting process, the process of managing the economy became very important. This role covers the activity of Fed, which used a number of tools in its oversight of the economy. These tools include open market operations, control of reserves, and the third tool are employing discount rate outlook. Works Cited Barro, Robert. “The Ricardian Approach to Budget Deficits.” Journal of Economic Perspectives 3. 2 (1989): 37–39. Print. Conte, Christopher, and Albert K. Karr. (Eds.). Monetary and Fiscal Policy. Washington, D.C.: U.S. Department of State. N.d. Web. 29 April 2013. . Mankiw, Gregory. Macroeconomics. 5th Ed. New York: Worth, 2003. Print. Popper, Nathaniel. “After Cashing In On Job Cuts, Wall St. Looks To Worker Upturn.” New York Times, 11 March, 2013. Web. 29 April 2013. Schwartz, Nelson. “Recovery in U.S. Is Lifting Profits, but Not Adding Jobs.” New York Times, 3 March 2013. Web. 29 April 2013. Read More