Professional Documents
Culture Documents
Monetary Policy
The first solution is expansive monetary policy from the Federal Reserve. It's powerful, quick
and effective. Lower interest rates make it easier for families to borrow what they need. That
includes expensive items like cars, homes and consumer electronics. It stimulates
enough demand to put the economy back on track. Low interest rates also allow businesses to
borrow for less. That gives them the capital to hire enough workers to meet rising demand.
Fiscal Policy
If the recession is really bad, then monetary policy might not be enough on its own. That's
when fiscal policy is needed. The government must either cut taxes or increase spending to
stimulate the economy. Expansionary fiscal policy is slower than monetary policy to get started.
It takes time for Congress and the president to agree on the next steps. But it can be more
effective once executed. It also provides much-needed confidence that the government will turn
things around.
Confidence is a crucial for convincing people to spend now for a better future.
Cutting taxes works like lowering interest rates. Both give businesses and consumers more
money to spend. That increases demand. It gives businesses more cash to invest and hire more
workers.
The government hires employees directly. It also contracts with companies to build things and
provide services. It provides consumers with the cash they need to buy more products.
Dollar for dollar, what's the best investment that creates the most jobs? A U Mass/Amherst
study found that building mass transit is the most cost-effective solution. One billion dollars
spent on public transportation creates 19,795 construction jobs.
The next is unemployment benefits. Every $1 billion spent on unemployment benefits creates
19,000 jobs, according to a Congressional Budget Office study. That's because the unemployed
are most likely to spend every dime they get. They buy basics like groceries, clothing and
housing. That drives retailers and manufacturers to hire more people to meet the
demand. Without these benefits, demand would drop. Then retailers would need to lay off their
workers, increasing unemployment rates.
Unemployment benefits work fast. The government writes a check that goes directly into the
economy. Public works projects take longer to get implemented. The plans must be updated,
workers hired and supplies delivered.
During the final quarter of 2008, unemployment programs paid $34.9 billion in benefits to eight
million unemployed workers.
That boosted economic growth by $57 billion. Every month in extended benefits cost taxpayers
$10 billion. But at the same time, it generated $16.4 billion in economic growth. (Source: "The
Economic Outlook and Fiscal Policy Choices," Congressional Budget Office, September 28,
2010.)
The third-best unemployment solution is funding education. One billion spent hiring teachers
adds $1.3 billion to the economy. That's because better-educated people can get higher-paying
jobs. They can buy more things with the higher wages they earn. Each billion also
creates 17,687 jobs. That's much better than defense spending. It only creates 8,555 jobs for
the same investment. Defense is more capital-intensive. Modern defense relies more on drones,
F-35s and aircraft carriers than soldiers.
That's not the most cost-effective, according to the UMass/Amherst study. One billion dollars in
cuts creates 10,779 jobs. Workers only spend half the money ($505 million).
As a result, reductions in the tax rate damage the economy. Every dollar in lost tax
revenue creates 59 cents in economic growth. Most people don't realize they are getting a
break until tax time. The tax cut means they play less in taxes, but they still have to pay.
Psychologically, they are less likely to spend anything extra. It just doesn't feel like a bonus. As
a result, people are more liable to save anything they get or use it to pay down other
debts. (Source: Robert Pollin and Heidi Garrett-Peltier, "The Employment Effects of Military and
Domestic Spending Priorities," Department of Economics and Political Economy Research
Institute, UMass/Amherst, October 2007.)
A more effective tax cut is in businesses payroll taxes. One billion dollars in payroll tax cuts
created 13,000 new jobs. The best place to give business tax relief is with small businesses.
They produce 65 percent of all new jobs.
The downside of government policy is it can add to the budget deficit. That creates
more government debt. As debt approaches 100 percent of the economy's total output, it
slows economic growth. That's because investors lose desire for that government's debt.
It makes interest rates rise, increasing the cost of borrowing.
Advocates of supply-side economics say that, over time, tax cuts boost the economy enough
to replace any lost tax revenue. But that's only true if taxes are very high to start with. For more
examples through history, see Job Creation: Ideas, Statistics, and Creation by President.