Michigan Small Business Administration Loans
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Fiscal Policy or Monetary Policy, which will help us out of the recession?
There is sometimes confusion around the difference between fiscal policy and monetary policy. Fiscal policy; Measures employed by governments to stabilize the economy, specifically by adjusting the levels and allocations of taxes and government expenditures.1 Monetary policy; The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates.2
Which one will help our current economic situation? While both are instruments that can be used by the government to influence the economy, monetary policy employs interest rates and money supply in this effort, while fiscal policy refers to taxing and spending by government to help stimulate the economy.
There are two means by which the government employs fiscal policy to influence the economy – taxing and spending. In a recessionary period like we are experiencing today, with increasing unemployment and slow business growth, government spending is a means of stimulating economic activity. Cutting taxes is another means by which government can put money back into the pocket of the consumer during a recession and thus stimulate economic growth. Conversely, during times of economic expansion, government may increase taxes, taking money out of the consumer’s pocket in an effort to moderate economic expansion and quell inflation.
The current fiscal policy in the U.S. is sometimes called a loose or expansionary fiscal policy, one in which government spending is higher than revenue. The reverse is known as a tight fiscal policy, a fiscal contraction, during which revenue outweighs spending. During a fiscal expansion, such as the one we’re in now, the desired effect of spending is to restore the output of goods and services, the gross domestic product, and put employees back to work. This, in turn increases the demand for goods and services and the overall health of the economy.
Unfortunately the fiscal policy of spending more than the revenue earned does not take into account the population confidence and emotional condition. The problem with the administration “printing more money” to create large stimulus packages to get businesses to start growth projects and expansion which in turn creates jobs and lowers unemployment, is that if the confidence of the business owners and executives is so low that they are remaining reluctant to begin growth and are continuing to add lay offs instead of hiring. This quickly becomes the vicious cycle, as the lay offs continue and consumer spending decreases, businesses decrease in production, causing more lay offs and less tax revenue is generated. With less revenue being generated and an increased need for stimulus, the administration is tempted to provide more stimuli at the expense of deficit growth.
While for the past decade or two the Federal Reserve Chairman Alan Greenspan was able to keep the United States from entering a recession by merely using monetary policy to regulate interest rates, with the situation we are in now monetary policy adjustments have little or no impact on our current economy. One must take into account a large reason of why the economy was easily regulated by monetary policy was the fact that the technology and real estate booms were experiencing out of control record expansion, consumer and business confidence was at an all time high, Wall Street and the stock market were experiencing record growth and profits and the unemployment rate was at an all time low.
The drastic change started in 2006 when the “perfect storm” hit Wall Street and the Capital had a drastic change in administration and congress control. With the combination of the technology crash in 2001, the Wall Street crash from September 11th 2001, the real estate bubble burst in 2007, bringing down Wall Streets biggest banks and insurance companies, and the drastic change in fiscal policy with an administration change in 2008 the economic situation was ripe for a dramatic change of direction and the recession was inevitable.
Though there are many philosophies, from the “experts,” as to how we can and should treat this current economic situation, I have to think that the solution of instilling confidence in the small business owners to drive the economic turnaround is the quickest and safest bet.
Today, we stand on the threshold of economic recovery. According to the September 16th issue of The Wall Street Journal, “Federal Reserve Chairman Ben Bernanke said Tuesday that the recession was ‘very likely over,’ as consumers showed some of the first tangible signs of spending again.” As small business owners, it’s now time to move out from under the cloud of fear and stand beside the banner of recovery.
Do you remember the 1983 film Mr. Mom, starring Teri Garr and Michael Keaton? In the film, Jack (Keaton) and Caroline (Garr) are married with three kids and living in the suburbs of Detroit, Michigan, during the 1980s recession. As the movie opens, Jack has just lost his job in the auto industry, [a big business], and Caroline has been hired by an ad agency, [a small business], forcing Jack to trade roles and become a stay-at-home Mr. Mom. 3
Like this fictional storyline, it is the small business growth that will help the struggling middle class recover and greatly instill consumer confidence, which in turn drives the economy forward. I know a large part of the of small businesses fear is the unknown of the administrations fiscal policy, taxes and mandatory healthcare expense, however that is just hearsay at this point and the current administration is starting to get the message of how the general public feels, with the results of the recent elections in New Jersey, Virginia and Massachusetts, that a majority of the people don’t want those types of tax increases and out-of-control spending. I am fully aware that the high ticket item industries, such as the auto and real estate industries, have been damaged so badly that a lot of those small businesses that were associated with those industries are gone forever, however the owners and entrepreneurs of those business, which have proven to have the knowledge and skills to start and run a successful business, need the confidence and assets to start a new venture in another industry. The government needs to concentrate the stimulus dollars towards the current and past small business owners to begin to grow the confidence and economy through their fiscal policy.
Having been a small business owner myself, I was put in the situation where the cost of maintaining the business was far outweighed by the risks, like having clients go out of business unexpectedly while having outstanding bills to my business. The risks coupled with increasing fees, costs of doing business and the overwhelming employee costs, made it impossible for the business to grow and my personal investment was increasing, while the venture capitalist monies disappeared. The only clear choice for my partners and I was to close the business and for me to become a “Mr. Mom” and stay home with my children. With increased capital made available by the feds fiscal policy I would be much more likely to again take on the risks of starting up another small business.
This supports the theory that the current administration needs to stop the rhetoric of how they are going to fix the economy, stop dumping stimulus money at the large corporations that self perpetuated their current economic failings and begin to create a new fiscal policy that will support and encourage expansion and growth of the small businesses in America. I have to conclude that the fiscal policy has to change and be implemented first before the monetary policy can take effect.
We all must hope that the current administration finds the complicated formula and balance between increasing the stimulus and increasing confidence soon, as the economy needs to be on the upswing before the monetary policies of lowering interest rates can again have an effect and banks in turn begin to have the confidence to take on the risks of loaning money again.
1 Britannica Concise Encyclopedia 2009.
2 Investopedia.com 2009
3 Begin Your Economic Recovery. Lower Your Prices Now! January 20, 2010, Small business trends, By Susan L Reid
About the Author
Paul is a freelance writer and future graduate student earning his second masters degree with a masters in public policy from Northwestern University in Evanston, Illinois. Paul is currently also an elected Committeeman and is very active in local and state wide political races.
Paul professionally is a consultant and communications manager for Santucci Communications in Aurora, Illinois. Many of Paul’s clients include US Senate candidates and members of the Illinois state legislature.
Paul lives in Aurora, Illinois with his wife and three children, coaches and plays soccer and enjoys every minute he can spend with his children.
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