Reducing federal government’s discretionary powers and Zero-inflation target
Reducing federal government’s discretionary powers
The federal government expenditure is increasing, chronic and deficient, and accrued debts are reaching beyond the levels expected. This growing expenditures and accrued debts are undermining the growth of economy pushing the nation financial crisis in future (Blanchard, 2010). The main solution to this issue is to downscale all federal department by removing the most damaging programs. This research suggests several cuts that reduces federal spending by a quarter and balance the government budget within an estimated period. The cuts are aimed to outgrowth economy by changing resources from lower-valued government events to higher-valued private ones. The Cuts expands on freedom by allowing people to have control on their lives and reduce regulations that come with spending programs. It is estimated that the rising spend shall produce large deficits between now and 2026 under the current law.
The legislators should change the law course in order to cut on spending and eradicate deficits. economists states that cutting government spending would shift resources from often misused and harmful government programs into a more productive private activities, and thus growing overall GDP. Markets have ability to allot resources to high-value activities, however the government cannot. Economists characterize the misallocation of government resources as waste thus When higher-valued resources are used for lower-valued activities (Pecchi, & Piga, 2010).
The Federal Reserve is accountable for setting interest rates, as this is a crucial power since interest rates determine the availability of credit. Low interest rates reduces the cost of credit and have the effect of stimulating the economy and generating economic growth. However, too low interest rates can have the effect of creating an excessive volume of debt within the economy, and widespread default on debt leading to various kinds of economic dislocations. Too high interest rates can have the effect of stifling economic growth in a variety of ways, such as imposing barriers to business development and job creation. The mission of the Federal Reserve is to attempt to maintain a balance between these various concerns (Timberlake, 2008).
Reducing the Size and Scope of Government
Some activities that the government engage itself in can be handled by private sectors, individual’s local government and organizations. A more limited federal government may focus on giving crucial legal and public services, and a simple social safety net, and may then leave individuals free to decide their own affairs to the extreme potentiality in the justification of liberty. Removing waste and regulating government spending is well attained by reduction of the scope and size of government.
Inflation targeting is an economic policy which is used by central bank of a country to publicly regulate a target inflation rate. Zero-inflation is a way to keep inflation levels as low as possible and avoiding its negative effects on an economy. Inflation targeting is an open way to explain interest rate policy and to anchor people’s expectations about the future inflation. Inflation target can limit the central bank’s elasticity in responding to economic conditions. However, other economists argue that inflation is not necessarily attached to any internal factor to a country’s economy hence struggling to maintain a zero-inflation level is not a variable target (Timberlake, 2008). Enhancing the credibility of inflation targets has resulted in reducing the short-run cost of achieving lower inflation. Inflation deliberates no benefit to society, however it does enacts several social costs.
When the inflation level is high, there is a general increase in the prices levels and the cost of living also goes up. The role of central bank therefore, is to control the circulation of money in the economy, to issue currency and to regulate the interest rates in a country. The central bank therefore, holds the mandate to control the inflation of a country. When the inflation rates are high, the central bank passes the policy of increasing the interest rates and decrease money supply so as to limit the about of money circulating in the economy. On the other hand, when the inflation rates fall below the identified range, the central bank lowers the interest rates and raises money supply in the economy so as to push the inflation up. The Rise of real interest rates comes about from the fall in inflation. The Rise of real interest rates makes it less attractive for people to borrow and invest; it encourages them to save. When the economy is low, this rise of real interest rates makes the monetary policy ineffective in encouraging growth.
The economy is affected by discretionary monetary policy with long and irregular lags between the “need to act” and the interval that it taken for the policies to exercise an effect of output and employment. Zero inflation is possibly unachievable and getting there encompasses output and unemployment costs that are very high. The simulative outcome of a slight inflation is essential to keep unemployment reasonably low. Inflation is connected to economic growth through the process of inter chronological substitution thus substitution of money or simply savings across time instead of spending now keep to spend later and vice versa. When there is some inflation, there is high probability of prices to rise in the future. The money has more value currently since the prices are lower, therefore one should spend now instead of saving for later. This spending keeps the economy running. Monetary and fiscal policy can alleviate comprehensive demand and, thus, production and employment. Since changes in aggregate demand translate into changes in employment and income, it is crucial to check on monetary policy change.
The Central Bank aims for Zero Inflation to control the country’s monetary policy changes. Most studies shows that changes in monetary policy have little effect on comprehensive demand for about six months since the change has taken place. Reduction of inflation is a policy with temporary costs and permanent benefits. Once the disinflationary depression is over, the benefits of zero inflation would persist. Empowering central banks with complete independence in conducting monetary policy is a problem since it does not limit incompetence and abuse of power.
Blanchard, D. (2010). Supply chain management best practices (2nd. Edition). New York: John Wiley & Sons.
Pecchi, L. & Piga, G. (2010). Revisiting Keynes. Boston: MIT Press.
Timberlake, R. H. (2008). Federal Reserve System. In Henderson, D.R. (ed.). Concise encyclopedia of economics (2nd ed.). Indianapolis: Library of Economics and Liberty.