Fiscal and monetary policies are the main tools used in formulating various strategies, actions that aim to reduce poverty. This issue leads us to poverty issue in the United States of America. Then, what are the various policies that can be used to eliminate poverty in the country. Should the policy makers make use of fiscal or monetary policy? Subsequently, what policy tools will be used, fiscal or monetary? In this write up there will be a comprehensive analysis on what policy option that should enacted to eliminate poverty in the USA.
To begin with, understanding what fiscal and monetary policy entails is necessary. Then, what is fiscal policy? In a simple term, fiscal policy refers to an effort by the government to manage, influence and guide the tempo or direction of the economy by using its major tools taxation and its total spending. There are two major tools of fiscal policy, which are taxation and government spending. In addition, there could be contractionary or expansionary fiscal policy. Expansionary fiscal policy here means when there is increase in government spending or reduction in taxation.
This normally leads to budget deficit and vice versa. While, monetary policy refers to an effort by the government to change the pace of the economy by influencing or controlling the money supply and interest rates. These various policies are pursued by government in other to achieve the basic economic objectives of full employment, stability in price level and growth of the economy. However, in the US the fiscal or monetary policies have to be enacted in other to reduce or eliminate poverty. In performing this task, different things have to be put in their rightful place.
Even though, poverty cannot be eliminated from the country yet with a very good fiscal and monetary policies it proportion could be reduce. The reason why I believe poverty cannot be completely eliminated is because of the way economy and nation evolves. From time immemorial, there have been some certain classes of people in the economy. They range from upper, middle and lower classes. In any economy, there will always be the lower class and this comprises of the people living below the poverty line.
In addition, there will always be those at the receiving end. Africa can be a very good example of this issue. Therefore, there is way how we would not have poverty in any nation. What can only be done is to reduce drastically the number. In country like the US, the poverty rate can be reduced to a small level if government pursues good monetary and fiscal policies. The government could enact fiscal, monetary policies and both together in the economy to reduce the poverty rate. These would be explained as follows:
Firstly, we are going to consider the fiscal policy. Since, our main aim is to reduce the level of poverty. The government could pursue both the contractionary or expansionary fiscal policy. However, global financial crises have an overall effect on the nations economy. Moreover, the US government could enact contractionary policy to reduce the level of inflation. Since, the tools of fiscal policy are taxation and government spending. The government should reduce its spending and increase the tax of the elite and the upper class in the nation only.
When this is done, the government will have more funds, which could be spent on increasing the aggregate demand of the lower class or people living below the poverty line. In a way the real income of the lower class will be increased through this policy, since the funds will be redistribute from the rich to the poor. In a way, there is the effect that fiscal policy has on the nation at large and on the individual as a whole. In as much as our focus relates to individual then, we pursue those action that will be beneficial to the individual rather than the whole nation.
In addition, when government pursue budget deficit the economy is receiving less than what its expend. In this case, the government will have to finance this deficit using different approaches. They could borrow the populace or sell assets. Sale of asset may include the sale of bonds and treasury bills in other to offset the deficit. Treasury bills and bond are example of government tools use to reduce the money in circulation. Government sells these to the public in other to remove money in circulation.
This money needed will be gotten from the upper class or the rich by increasing their tax. On the other hand, an expansionary fiscal policy could also be enacted. Here, the government should reduce the tax of the lower class and government should increase their spending on economic activities that could increase aggregate demand of this lower class and result in increased productivity. When government takes this action, the real income or the disposable income of this class of people would increase and thereby increasing their purchasing power.
Given that, disposable income is the income that is left for spending when tax has been removed from income. In addition, when government increases their spending they pursue budget deficit. Here, they should incur these funds on economic activities that could increase the productivity and aggregate demand of the lower class. When there is increase in government spending, it means that the government is redistributing its asset to its populace. Thereby increasing total productivity in the economy and leading to increase in total income.
This increase in total income will trickle down to the lower class and increase their disposable income. In essence, when government pursues the basic economic objective, they will be solving the issue of eliminating poverty indirectly. Therefore, the government could use fiscal policy in reducing the level of poverty in the nation However, the government in pursuing this objective of eliminating poverty can also use monetary policy. They could also use expansionary monetary policy. In a way, contractionary monetary policy will not be effective in achieving this objective.
When they wish to use expansionary policy, the government should influence the interest rate by reducing it using its various tools. When this happens, investment will increase leading to increase in productivity that will trickle down to the lower class. Since, increasing productivity more labor effort would be require in achieving this. Then, there will be increase in employment that will trickle down to the lower class. In a way, more people will be employed and this will include the lower class.
This situation will increase the real income of the lower class and will enable them live above the poverty line. However, the contractionary monetary policy will not be effective in this case. Since, under this policy there will be reduction in the rate of interest and consequently leading to decrease in productivity. When productivity is reduced, it means inventory is reducing and companies are sacking workers and this most times affects the lower class. Therefore, this will further worsen poverty situation in the country and contributing to increase in the level of unemployment.
In another way, the government could combine both fiscal and monetary policies in other to achieve their objective of eliminating poverty in the country. What is needed is the right combination in other to guide against inflation. The government could influence the interest rate and at the same time enact policy that would make lower income earners pay reduce tax or used to offset the feedback from these policy option. The government could also combine expansionary monetary and fiscal contractionary policies in a way to offset any feedback from this policy options.
In conclusion, there are ways the government of the United States of America could use to eliminate poverty. However, we should have it in mind that poverty cannot be eliminated permanently in the country. It could only be reduce to its barest minimum. In a way, the government actions are very vital. The two main policies to be enacted are the monetary and the fiscal policy. Finally, I think the global financial crises have a way of influencing the way these policies will work.