How should the U.S. government deal with a recession/depression?Refer to today's recession with examples.
This is my opinion, but I think that the government should cut taxes or even consider a 3- to 6-month federal income tax holiday. This might sound extreme, but it would give consumers extra money to perhaps save up for a down payment (to stimulate the housing market), to spend money at local and national businesses, to pay off debt, etc. Cutting taxes is a proven method in easing or obliterating a recession. President Reagan served during a major recession during the 80s, and when he cut taxes and focused on unemployment issues, the country gradually came out of the recession.
Right now, the most significant issue with unemployment and lack of spending seems to be the government's focus on issues that are unrelated to the recession. While most Americans believe that the country needs health care reform, they also are more focused on simply having a job in the first place and seem to want all of our Congress to do the same. Many economistshave stated their concern thatthe United States cannot continue its increased spending when people do not have jobs and are, therefore, not paying into the tax pool.
Some small business owners who are, arguably, the backbone of our employment are not hiring because they do not know what new taxes might be imposed upon them.Some members ofCongressand from the President's team have suggested allowing small business owners a tax break from social security taxes if they begin hiring. What this would mean is that the normal social security taxes that the employer has to pay on eachemployee wouldbe non-existant for a specified time period. This idea has seemed to be well-received by employers, but ithas notgone very far yet in Congress.
President Franklin Roosevelt gave us a pretty good model to follow, I believe, in that the New Deal he put together with his brain trust addressed major areas of concern in the economy.
First, he provided immediate relief with jobs and food, which we are doing today with unemployment benefit extensions and more money for the Food Stamp program.
Secondly, he saved the major economic systems we would need if we were ever to come out of the Depression: Agriculture, Housing and Banking. Agriculture still receives subsidies today, so it is intact and functioning reasonably well. Housing has not yet bottomed out, but the government has offered and extended a generous tax credit to people who buy houses, and soaking up the bad loan debts of banks. Lastly, we have done the most for the banking industry, though you could say we were a little sloppy. The bank bailout stabilized the system so that loans could be the future engine of a recovery. This was not only wise, but essential, even if it was painful.
I agree with what we have done thus far in response to recession. But our economy is too large for a government policy of any kind to save it. The best they can do is keep us afloat until the economy heals itself, and regulate it so future harsh recessions don't happen.
A quick answer to this question would be entirely dependent on which kind of economic thinker you asked. Some economic thinkers might argue that governments should not interfere in matters of the self corrective measures of the free market, which is what an economic recession or depression is. For example, the artificial inflation of the housing market where individuals entered into risky mortgages or financial situations whose default triggered the current economic crisis is simply an example of the market regulating itself. Thinkers who believe this feel that if anyone interferes with the market practices, there is irreparable damage done to nature and fabric of the marketplace. Other thinkers believe that the business practices that cause recessions should be monitored and action should be taken if individuals/ organizations are engaging in unhealthy business practices. It is here where both responses to a recession/ depression find divergence.
This is totally a matter of opinion and it also depends on the specific circumstances that have caused the problem (which is also a matter of opinion).
I think that the government in general needs to deal first with the major impacts of the problems. They need to do something to help the people who are losing jobs so that they do not drag the economy into worse problems. This time, that also involved rescuing GM and some banks. I think this was necessary to prevent a worse problem.
Second, the government needs to start making more systematic changes that will prevent the problems from happening again. This is harder because what caused the problems is a matter of opinion -- was it lack of regulation or was it too much regulation?
Economic recessions and depressions as well as economic boom are caused by a combination combination of actual performance of the primary, secondary, and tertiary sector of economy as well as by the sentiments and expectations of the people about their own earnings in future, which in turn is influenced about the expectations of the people about future performance of the economy in term of economic production and the market prices of investments.
In a typical depression, the GDP of the economy and therefore average income of the people is not reduced because the economy does not have the physical means to produce and consume more, but because of the reluctance of people to spend money because they expect worse days ahead and they try to save more and more "for the rainy day". This causes the complete market machinery of the economy, and with that production flow to slow down, leading to recession.
Thus I believe most essential part of a long lasting solution to the problem of depression will be to remove the causes of loss of confidence of the public. Surprisingly, the main culprit for this is the market booms. Big businesses and politicians find it to their advantage to stoke the fire of economic boom to unrealistically high levels to serve their selfish motives of personal gains. As a result stock prices, real estate prices, and spending on credit rise to a level which are not sustainable for extended period. It is like a bubble blowing up without any limits. Ultimately a bubble like this has to burst, reversing the boom to depression.
I see no government programs or policies that are designed to give relief to the common man. All the programs are designed to prop up big corporation who have caused the depression in the first place. For example, because banks can't recover the money they have loaned out the government is ready to finance them from the public money. But this does not benefit the common directly man in any way. If banks are that short of funds, why can't they offer some concessions to the their borrowers to repay them in advance of their commitments. These concessions could be in form of waving off of some of the loan amount or reduction on interest rate, which is linked to the amount of advance repayments mad. This way banks will have their liquidity, and common people would also benefit in form of reduced repayment liabilities. Thus I believe the government action should be in form of incentives to the companies that take help of common people and compensate them adequately for the help given. In this way the big corporations and common people will become partners in fighting the recession rather than adversaries.