USING MONETARY AND FISCAL POLICY TO STIMULATE THE ECONOMY

With most economic indicators heading south, there is little debate that the country is headed for a slowdown or even a recession. To stimulate the economy and lessen the impact of any downturn, the government is prepared to use two weapons: monetary policy and fiscal policy.

Monetary policy is controlled by the Federal Reserve, the United States' central bank. The idea behind monetary policy is that the Fed can increase or decrease the supply of money in the economy. If the economy is overheating and/or inflation is a worry, the Fed can decrease the supply of money in the economy, slowing the economy down to a more acceptable level. This is considered a restrictive or contractionary monetary policy. If the economy is sluggish, as is the case now, the Fed can increase the money supply in the economy. While there are several ways this can be done, none gets more attention than the lowering of key interest rates, which the Fed has done recently, and is expected to do again very soon. So, while there may be debate about whether the Fed acted in a too-little, too-late fashion, there can be no argument regarding the Fed's actions being consistent with an attempt to stimulate the economy, which is called an expansionary monetary policy.

Fiscal policy concerns governmental revenues, which are primarily taxes, and expenditures. Fiscal policy is controlled by the president and congress. Neither usually get to dictate a preferred policy, but rather must work together through compromise to establish a tax and spending program. During an economic downturn, as we are experiencing now, fiscal policy can be used to stimulate the economy. How? Typically by some combination of cutting taxes, tax rebates, and governmental spending, all designed to put money into the pockets of consumers and businesses so that they will spend, spend, spend. The more and the faster they spend, the less likely a downturn will continue or worsen.

President Bush is working on a stimulus plan to put approximately $150 billion into the economy, which is roughly 1% of GDP. Democrats agree that a stimulus plan is needed, but there is disagreement about how to tailor such a plan. Democrats want tax rebates for most Americans combined with one-time increases in programs such as food stamps, unemployment benefits, and home heating assistance for the poor. President Bush wants a tax relief-only plan that gives $100 billion to individuals and $50 billion to businesses. Both plans would likely provide needed relief and stimulate the economy. Now, it is up to our governmental leaders to compromise on a plan that both they and the American people can live with and benefit from.

For more information on the fiscal stimulus plans being developed, check out the following articles:

BUSH PUSHES $150B ECONOMIC AID PACKAGE - AP via Yahoo

BUSH PROPOSING $145 BILLION PLAN TO SPUR ECONOMY - The New York Times

TAX REBATES SEEN AS ECONOMIC STIMULUS - USA Today