The application of the Keynesian theory of economics has been a long standing controversy between the conservatives and the liberal factions of the American political, social, and economic fronts. Despite the controversy, Keynesianism has evidently influenced economic policies in the United States since the Second World War. This essay explains the impact of Keynesian Economics on fiscal policy in the United States. First, the author will briefly detail the provisions of the Keynesian economic theory.
Some examples of recent policy actions that represent attempts at using Keynesian principles in the US are also given. Keynesian theory of economics describe a normal economy as one marked with high employment levels and normal spending by individuals in the society, a factor which leads to continuous circulation of money in the economic (Mankiw). According to him, shaking the confidence of the consumers to the economy forces them to save their income as a way of weathering the economic hardship. Failed flow of consumer money into the economy prompts the supplies to hoard their money (Mankiw).
This causes a vicious circle where everybody is not willing to spend their money, thus risking an economic recession. In order to resolve this economic crisis, Keynesian Economics calls for the central bank to engage in expanding and contracting money supply in the market (Rigdon, et al 67). According Keynes, when the government pumps more bills to the people, their confidence in the economy is boosted, forcing them to increasing their expenditure, thus reinstating the normal circular flow of money in the economy.
This theory has found its widespread use in controlling the American economy. This is first evident in the common practice by the Federal Reserve Bank of buying government debt from commercial banks which increases the amount of money these banks can lend (Bardes, Shelley, and Schmidt 71). Another impact of the Keynesian Economics in America is the move by the government to reduce credit requirements for commercial banks. This allows the banks to generate more money from its operations.
Still, the Federal Reserve Bank can reduce it lending rates to commercial banks thus allowing them to lend more money (Bardes, Shelley, and Schmidt 76). All these serve to increase the amount of money in commercial banks, a factor which enhancing its lending capacity. On the other hand, to contract the flow of money in the economy, the Federal Reserve Bank will increase its selling of US debt, increase credit requirement, and lending rates to commercial banks (Bardes, Shelley, and Schmidt 104). This limits the lending ability by commercial banks.
This is what is commonly referred to as countercyclical policies as they contradict the direction of the business system to ensure a balance of the economy. Available literature indicates that through contracting and expanding of money supply by the Federal Reserve Bank, the American economy has managed to survive an economic depression of same magnitude as the Great Depression of the 1930s (Rigdon, et al 67). This information claim that America has sailed through nine recessions during the twentieth century without any going to a depression.
Such recessions include those of 1960-61, 1973-75, 1980-83, and 1990-92. Thus, economic control in the American nation employs the Keynesian Economic theory as the government gives the Federal Reserve Board the mandate to balance the economy through the discretionary monetary policy (Rigdon, et al 89). There are a number of examples of recent policy actions by the American government that represent attempts at using Keynesian principles. The Obama administration entered offices in the midst of an economic recession that had seen an increase in the rate of unemployment among the Americans to an estimated 8%.
In a move to restore the economy, the government engaged in pumping significant amount taxpayer money. This move was aimed at limiting the level of unemployment to below 8% (Bardes, Shelley, and Schmidt 123). Such was in line with the Keynesian economic theory which claims that in a recession crisis, the government should expand money supply to enhance consumer confidence in the economy, thus reestablish the cyclic flow of money into the economic. However, this economic stimulus did less than to worsen the unemployment rates in the nation to about 10% by January 2009 (Rigdon, et al 71).
The government has nevertheless defended this move claiming that the stimulus was too small to significantly revive the deep recession that had impacted on the American economy. Due to this reason, the Obama administration seeks approval for a second economic stimulus. The failure of this fiscal policy has been blamed for taking for granted the dilemma between government spending and reduction of tax as viable approaches to economic recovery. Critics of increased government spending in a short time it ineffective given the complex process of approval and reliable implementation compared to tax reduction.
In conclusion, Keynesian economics has greatly influenced fiscal policy actions in the US since after the second. This is the model that is thanked by many for the economic prosperity since the postwar era. However, employing this theory in developing a fiscal policy should be based on a clear analysis of the most viable approach of combination of approaches to take. Such include; increasing government spending, reducing tax, and/or reducing prime lending rates. Works cited
Bardes, Barbara, Shelley, Mack, & Schmidt, Steffen. American Government and Politics Today, 2008, Brief Edition. Belmont, CA: Cengage Learning, 2009. Mankiw, Gregory. “The Reincarnation of Keynesian Economics. ” The Reincarnation of Keynesian Economics. Oct. 1991. 12 Aug. 2010. <http://www. iisec. ucb. edu. bo/amercado/clases/macroeconomia_maestria/lecturas/The_reincarnation_of_keynesian_economics. pdf> Rigdon, Susan, et al. Understanding American Government. Belmont, CA: Cengage Learning, 2009.