One of the functions of government, according to the Preamble to the Constitution is to “provide for the common welfare” of all the people. In addition to other means of doing this the Federal Government is supposed to supply enough currency to meet the needs of the population, always keeping the amount below an inflationary spiral.
In times of recession when there is not enough money in the National Cash Flow the government has and should utilize its two major means of adding currency to the flow. These are Monetary Policy and Fiscal Policy. The Federal Reserve controls Monetary Policy. Through it, by various means, money can be added or subtracted from the economy depending upon the immediate needs of the country. Congress and the President control Fiscal Policy. They can also add or limit the money supply by various legislative means.
Government spending also includes other factors than the health of the economy such as the cost of government, as well as expensive items like wars and natural disasters or rebuilding the infrastructure of the nation. They can terminate recessions or periods of inflation by passing legislation, at these times spending money to reinvigorate the economy.
Currently the country is presumably facing two major problems: massive debt and massive unemployment. Whether the massive debt is real or not is an academic question. If unemployment is significantly lowered through government spending then we increase the National Debt and if the National Debt is lowered then we further increase unemployment. Which way makes the most sense?
The Federal Reserve is adding forty-five billion dollars a month in currency to the National Cash Flow. That is 540 billion dollars a year by buying up, on the secondary market, U.S. debt. It is also purchasing forty billion dollars worth of real estate paper (mortgages) per month. That is 480 billion dollars a year buying bundled real estate. These moves are adding money to the economy, unraveling the housing bundling fiasco, creating a shortage of housing in the United States, bringing about economic growth by causing new construction throughout the country, and adding a substantial amount to income taxes in monies that are no longer being deducted for interest from housing loans. This process has gone on for well over a year causing gradual and continual growth in the economy.
New Money added to the economy has a multiplier effect; that is, the money is spent a number of times before it becomes part of the naturally enriched cash flow. The amount of new productivity is three to six times the amount spent. This spending, in addition to the advantages we’ve seen above, is adding no less than one trillion dollars a year to the GDP and probably the amount is well over two trillion dollars annually.
All of this is Monetary Policy, which is generated by the Federal Reserve. Dr. Ben Bernacke, an economist, who was appointed by a Republican president, heads the FED.
Monetary Policy has improved conditions within the economy. The GDP is very gradually improving but it is not doing so fast enough. In order for complete recovery to occur Fiscal Policy is needed. At present the goal of the Republicans is to reduce the deficit. They have been successful in turning the problem from a need for more employment to reducing the debt, which has not occurred. This has been done by forcing the president to cut programs in order for them to raise the debt limit and have the government pay its bills. In essence their policy has been to economize and limit economic growth, the opposite of fiscal policy. This is a program working against economic recovery, in that, among other things, it has reduced government employment.
Because they could not reduce the cost of the social programs the Republicans came up with the sequester around eleven months ago which gradually will cut, across the board, all government programs; that is, the different programs that both the Republicans and the Democrats favor, being both social and military, reducing virtually everything upon which the government spends money. The result will be to gradually and continually reduce employment, both militarily and among civilians who are dependent upon military contracts. Some of this job loss will probably be picked up by private economic growth but there will still be an increase in unemployment.
What is needed is an acceptance of unemployment as the major problem the nation is currently facing and the application of fiscal policy to solve it. Economizing may be worthwhile but not at the cost of hurting a goodly percentage of the population.
A number of people in Washington are applying Microeconomics, their own household budgets, as the means of operating this country. They need to understand that the United States Government operates through Macroeconomics. It can issue currency as needed to increase employment and grow the economy. A larger economy with the bulk of the population employed will be paying much more in taxes and could conceivably reduce the National Debt. This would also be a successful means of economizing. It would successfully rebuild the infrastructure and phenomenally increase productivity.