Case William Phillips in below appendix, it showed an

 

Case Study

                                                          

 

 

Ting Zhang

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Student Number: 3081857

 

 

POL 2320 – 051

 

INSTRUCTOR: Dougald Lamont

 

 

 

 

 

 

SUBMITTED: November 28th, 2017

Introduction:

“An economy is not a machine” is an
article published on October 19, 2015, the author Forbes explicitly presents
his point of view that the government is destroying the economy by inappropriately
implementing economic methods including adjusting inflation, carrying out
monetary policy and fiscal policy. Throughout the article, a mass of government
mistakes is presented to demonstrate the severe errors made by the government,
thereby distorting the marketplace including weakening the dollar, implementing
zero-interest-policy, and increasing taxes aiming. Forbes starts with saying an
economy is not a machine which cannot be manipulated, guided or driven (Forbes,
2015). Following that, plenty of detailed examples are listed in the article to
further support his point of view that neither the monetary policy nor fiscal
policy used by the government is efficient. Forbes is appealing to the
government to make wise and active government guidance, employing the right mix
of fiscal and monetary policies, thus bringing perpetual prosperity. Forbes’s
argument is not only to provide an understanding of the issues happening in the
US and the economic policies implemented by the US government, it is but also
to appeal audience to think whether or not these government approaches really bring
benefit to the economics. By reading this article, it reminds me of various
principles we have learnt in the class such as the relationship between
inflation rate and unemployment rate, pros or cons of monetary policy and
fiscal policy implanted by the government. I believe that economy is not a machine
which should not be operated as a machine.

 

Relationship between inflation rate and unemployment rate

Refer to “The Phillips Curve” named after William Phillips in below appendix, it showed an inverse relationship between rates of unemployment and corresponding rates of inflation that result within an economy. Stated simply, lower rates of
inflation will correlate with increased unemployment. It is mentioned in class
lecture that The Philips Curve is an important formula, because for a while in
the 1960s, it was extremely successful at predicting. However, in
1968, Milton Friedman asserted that the Phillips curve was only
applicable in the short-run and that in the long-run, inflationary policies
will not decrease unemployment (Friedman, 1968). Friedman then correctly predicted
that both inflation and unemployment would increase in
the 1973–75 recession (Friedman, 1968). On the other hand, it was
also brought up that the rate of inflation has no effect on unemployment the
long-run which Phillips curve is now seen as a vertical line at the natural
rate of unemployment (Pettinger,
2012). In recent years the slope of
the Phillips curve appears to have declined and there has been significant
questioning of the usefulness of the Phillips curve in predicting inflation.
Today, most economists no longer use the Phillips curve in its original form
because it was shown to be too simplistic. This can be seen in a cursory
analysis of US inflation and unemployment data from 1953–92 (Friedman, 1968).

 There are several major
explanations of the short-term Phillips curve regularity. To Milton
Friedman there is a short-term
correlation between inflation shocks and employment. 
Economists such as Edmund Phelps reject this theory because
it implies that workers suffer from money illusion. However, other economists, like Jeffrey Herbener,
argue that price is market-determined and competitive firms cannot simply raise
prices. They reject the Phillips curve entirely, concluding that unemployment’s
influence is only a small portion of a much larger inflation picture that
includes prices of raw materials, intermediate goods, cost of raising capital,
worker productivity, land, and other factors (Friedman,
1968). Friedman
mentioned that inflation is “Too much money chasing too few goods”. In other
words, prices will increase if demand is growing faster than supply. This
usually occurs in rapidly growing economies. It is mentioned in the class
lecture that lower taxes, less regulation, and greater “labour mobility”
(easier to hire and fire workers, less unionization) would be solution. The Phillips Curve is still a
controversy topic nowadays. While tremendous
different economist’s’ point of views towards the relationship of unemployment
rate and inflation rate are ongoing, it is difficult for the government to implement
correct polices to control these two rates especially the relationship of
unemployment rate and inflation rate is still uncertain.

 

The consequences of
inflation fighting

Edward
mentioned in his article that government is responsible for inflation (Edward, 2000).   

Inflation is caused by printing more money. The government’s monetary
policies are responsible for this. Keynesian spending policies and ideology and
the abolishment of the gold standard have permitted the government to
depreciate our currency.  
The answer is to eradicate state control of the money supply. We need to divest
government of its power to arbitrarily increase or decrease the money supply.
In addition, we must build in pressures toward fiscal responsibility by the
government with respect to the production of balanced budgets and reduction of debt.
The federal government must learn to live within its means – government
deficits must be prevented. The establishment of the gold standard will stifle
the hidden and deceptive tax of inflation. Inflation could be controlled if
government were not able to monetize debt or manipulate reserve requirements.  

It is
mentioned in the lecture that fighting inflation and all these economic polices
often get credit for the growth that took place. However, one of the things
that happened is that the price of oil plunged – which no one expected. For
example, price of oil drops from $30 to $10 in
March 2015. OPEC was a
cartel, and they opened the taps again. So that certainly helped with growth in
developed countries but it had other effects. The
consequences of inflation fighting were that Reagan, Thatcher, Trudeau all run deficits and borrow at
near 20% and laid a base for debt to come. It wiped out manufacturing in U.S., UK
and Canada because manufacturers can’t handle financing costs. It created
“Third World Debt Crisis” because countries can’t handle debt repayments.

 

Government money printing
to pump up the economy is a blunder.

In the article of an economy is not a
machine, Ludwig von Mises sardonically pointed out that government money printing
to boost the economy is a blunder, for it cannot be as simple as to pump gas
into an engine: “an economy is not a machine” (Forbes 2015). According to
Mankiw et al. (2014), in the long run, excessive increasing in the quantity of
money causes inflation, which results in the value of money to fall and the
average of all prices of goods and services to rise; the faster the government
creates money, the greater the inflation rate. Rates
of inflation are calculated using the current consumer price index
(CPI), it measures changes in the price level of a market basket of consumer goods and services purchased by households (Forbes,
2015). Forbes pointed out in another article “Fed
Foolishness Festers” (2016) that 2% inflation specified as the avowed target to
stimulate the sluggish economy is destroying the global economy. According to US inflation calculator
published on October 18, 2016, by the US
government, the latest inflation rate for
the United States is 1.5% through the 12 months ended September 2016. The
Inflation Rates Graph below displays annual US inflation rates for
calendar years 2006-2016. The Federal Government is trying to push it to 2%; however,
higher inflation will have negative impacts on economic and social consequences.

Forbes believes that
the government is not being efficient and encourages them to make wise and
productive decisions. Inflation is an issue that is being pointed out by Forbes
that the Federal government should consider not raising it too high. First of all, rising inflation leads
to the depreciation in purchasing power of a fiat currency. For instance, it often
results in the appearance of rising prices when you attempt to buy
essentials such as milk, wheat, meat, clothing, medical services, coffee, or
electricity. In the article, the given example illustrates this which is the
Federal Government’s and the Treasury Department’s blunders in weakening the
dollar in the early 2000s led to the false commodities boom. Secondly, rising
inflation leads to a fall in real incomes. It is important to realize that the
possibilities of having inflation with no increase in income. The income is the
same, but more money will have to be spent on buying goods. According to “Fed
Foolishness Festers” (2016), the Federal Government’s indicates that the 2%
inflation would lead to a 3.5% rise in real wages, it illustrates that the
inflation will not affect the real wage only if the wages keep pace with
inflation. Usually, in the UK, inflation generates wages to rise, for employees
may get 7% increase if inflation goes up to 5% (Pettinger 2011). However, it is
uncertain if the reality will go toward the direction of what the US Federal
Government’s said. Thirdly, rising inflation leads to a both personal and
business uncertainty in making (Forbes, 2015). High and volatile inflation is
not beneficial for building business confidence, the partly reason would be the
difficulty in making sure what the real costs and prices are likely to be. This
uncertainty might lead to a lower level of capital investment spending. As
shown above, rising prices, falling real incomes, and business uncertainty, these are the factors that affect the Federal
Government’s money printing to
stimulate the sluggish economy
significantly, and are also the factors that cause the negative results by the
rising inflation; therefore, the Federal Government should think wisely while making decisions on adjusting the inflation.

How Does Monetary Policy Affect Economic Growth?

Monetary
policy is enacted by central banks by manipulating the
money supply in an economy. Interest rates and inflation are both influenced by
the money supply, both of which are major determinants of employment, cost of
debt, and consumption levels. A central bank either buying Treasury notes,
decreasing interest rates on loans to banks or reducing the reserve requirement
to implement expansionary monetary policy. All of these actions increase the
money supply and result in lower interest rates which creates incentives for
banks to loan and businesses to borrow. Debt-funded business expansion
positively affects consumer spending and investment through employment. 

Some economists argue that the central
bank tries to maintain price stability through controlling the level of money
supply which indeed plays a stabilizing role in influencing economic growth
through a number of channels. Since sustained increase in price levels is
adjudged substantially to be a monetary phenomenon, monetary policy uses its
tools to effectively check money supply with a view to maintaining price
stability in the medium to long term. Monetary policy has far reaching impact
on financing conditions in the economy, not just the costs, but also the
availability of credit, banks’ willingness to assume specific risks, etc. It also
influences expectations about the future direction of economic activity and
inflation, thus affecting the prices of goods, asset prices, exchange rates as
well as consumption and investment. However, opposite voice towards monetary
policy that it will slow production and increase unemployment rate.

 

Monetary policy: zero-interest-rate policy is another
catastrophic mistake.

There are
many methods used to control inflation, including some that work and some that
don’t work without damaging consequences such as a recession. For example, controlling
inflation through wage and price controls can cause a recession and
hurt the people whose jobs are lost because of it.

In this
article of “An economy is
not a machine”, Forbes pointed
out that zero-interest-rate policy is
another error made by the Federal Government. The zero-interest-rate
policy is mostly implemented after an economic recession when unemployment,
deflation, and slow growth conquer (Nath, 2015). For instance, it took place in
contemporary Japan and December 2008 through December 2015 in the United
States, the aim was to raise inflation and to stimulate economic growth. As a
result of Japan’s incapable of resolving stagnation and deflation, the
Japanese economy drop into a liquidity trap (Nath, 2015). The
government’s advocating declining the interest rate is in the hope that it
could appeal to business to borrow more money to ultimately achieve the goal of
expanding the economy; in contrast zero-interest-rate policy is proven to be
the poison for the customary flows of credit (Forbes 2015). According to Pettinger (2012), a proactive monetary policy which includes
cutting the reserve ratio or permitting excessive money supply should be used as
an expansionary policy to stimulate the economy. However, cutting interest
rates is not guaranteed to cause a strong economic recovery, and expansionary
monetary policy may fail under certain conditions.

Forbes indicates that
the government’s decision on implementing zero-interest-rate policy is not being
efficient since zero-interest-rate policy may fail under certain
conditions, thus encourages them to make wise and productive decisions. Firstly, if
confidence is very low, then people are not motivated to invest or spend,
despite lower interest rates (Pettinger 2016). It illustrates by an example
given in “Fed Foolishness
Festers” (2016) that capital
expenditures by businesses stagnated because of economic uncertainties. In
addition, if in a global recession, then there might be a strong fall in
exports which outweighs the improvement in consumer spending (Pettinger 2016). More
importantly, if the proactive monetary policy is carried out crackbrained,
awful inflation might be caused before economy recovery. Pettinger (2012)
indicates that if the Federal Government estimate inflation would be temporary
and there would be a greater risk of recession, the Federal Government may
pursue expansionary monetary policy despite considering the excessive inflation.
On the other hand, simply cutting the interest rate may boost the economy in a
short run; however, in the long-term use of very low interest rates can
lead to opposite effects, including the frightening liquidity trap (Nath,
2015). The zero-interest-rate policy is proved to be another catastrophic
mistake made by the government, for the influencing factors preventing the
economy to be revved up have not been taken into deep consideration.

 

How Does Fiscal Policy Affect Economic Growth?

Fiscal
policy is the term used to describe efforts by a government to influence the
level of consumption, investment, unemployment or inflation in the economy. The
fiscal policy tools consist of tax policy, government spending, regulation or
other measures. Monetary policy refers to the manipulation of the money supply
and interest rates by a central bank. Fiscal policy is typically contrasted
with monetary policy. It is difficult to evaluate the success of fiscal
policy. Looking back to the Great Recession of 2007-2009 in the United
States the single largest fiscal policy proposal in economic history. With
unemployment rising in the fourth quarter of 2008, the Obama administration
proposed a government spending plan of approximately $800 billion (Pettinger, 2012). The
Congressional Budget Office (CBO) and Mark Zandi, chief economist forecasted that without the stimulus plan, the unemployment
rate in the U.S. could top out as high as 8.94% by October 2009 (Pettinger, 2012). With the stimulus, the CBO suggested that unemployment
would only hit 7.71% for the same time period. It resulted by
October 2009, the unemployment rate was 10.1%. This was significantly higher
than the “no stimulus” worst-case scenario proposed by the CBO and
Zandi (Pettinger, 2012). There are no clear answers to the question of whether or
not the CBO used the wrong formulas, whether or not the wrong stimulus was
used, and whether or not fiscal policy actually hurts the economy rather than
help it. It only can illustrate that fiscal policy remains an imperfect,
inexact and uncertain macroeconomic tool.

 

Fiscal policy: tax increases compound the Federal
Government’s mistakes.

Fiscal
policy is another economic tool often used by the government to stimulate the
economy by cutting taxes or increasing government spending (Forbes, 2015). However, if the government spends more than it collects in taxes, it
results in federal budget deficit (Forbes, 2015); therefore, the government will try to increase the taxes in the hope
that the budget will be balanced. Forbes indicates that the Federal Government compounded
their mistakes by increasing the taxes, for imprudent carrying out high tax
policy cannot be comparable with pumping gas into an engine, the only thing it
does is distorting things, thereby hindering progress (Forbes 2015).  

Forbes believes that
the government should think wisely before increasing the taxes, since the
increasing taxes policy may distort things. Firstly, according
to BUS 1201 Custom Text (2016), taxes policy affects consumers and business’s
decisions. If the tax is low, consumers and business will have more money to
spend on goods and services; reversely, it leads to the output of market demand
shrink, thereby slowing down the economy. Moreover, increasing taxes causes more
and more local companies move their facilities in other countries in order to
reduce their tax burden and have the ability to compete with companies in other
countries with low taxes (Forbes,
2015). Furthermore, the high tax burden
and inappropriate government expenditure lead to weak domestic consumer and
unhealthy property market. For these reasons, hastily increasing tax policy is
another wrong decision made by the government; they should anticipate all the
possible consequences before making decisions.

 

Conclusion:

All in
all, the economy recover of USA is not smooth because the economy is not a
machine, it cannot be manipulated like a machine. The increasing inflation
rate, decreasing interest rate, and raising taxes policies are the economic
methods of stimulating the economy, but they should be implemented wisely. Facing
sluggish economy, it is necessary for the government to take prudent policy
adjustments; nevertheless, how to appropriate utilize the economic methods to boost
the gloomier economy should be taken into deep consideration by the US government.

 

 

 

 

 

 

Reference:

Edward W.
Younkins (28 October 2000) Montréal, No 70. Quebecoislibre  http://www.quebecoislibre.org/001028-11.htm

Friedman, M (1968) “The role of
monetary policy”. American Economic Review. Wikipedia, https://en.wikipedia.org/wiki/Phillips_curve

Forbes, S. (2015) ‘An economy is not A Machine’, Forbes
18.

Forbes, S.
(2016) ‘Fed Foolishness Festers’, Forbes 12.

Mankiw, N. G.
& Kneebone, R. D. & McKenzie, K. J. (2014) (ed.) Principles of Microeconomics, Canada: Nelson
College Indigenous. 

Nath, T. (2015) What is Zero Interest-Rate Policy (ZIRP)?
Investopedia,

http://www.investopedia.com/articles/investing/031815/what-zero-interestrate-policy-zirp.asp (Accessed 25 October 2016)

Pettinger, T. (2011) Personal Debt and Inflation, Economicshelp, http://www.economicshelp.org/blog/3188/inflation/personal-debt-and-inflation/ (Accessed 25 October 2016)

Pettinger,
T. (2012) Expansionary Monetary Policy,
Economicshelp,            http://www.economicshelp.org/blog/4886/monetary-policy/expansionary-monetary         policy/ (Accessed 25 October 2016)

Pettinger, T. (2016) Effect of lower interest rates, Economicshelp,     http://www.economicshelp.org/blog/3417/interest-rates/effect-of-lower-interest-rates/    (Accessed 25 October 2016)

 

US Inflation
Calucator 2016, Coinnews Media Group LLC,  http://www.usinflationcalculator.com/inflation/current-inflation-rates/
(Accessed 25            October 2016)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix:

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