Government Econ Policies Ensure Financial Security for Citizens - Essay Sample

Introduction

It is the role of the government to ensure that favorable economic policies are in place to allow its citizens to enjoy the economic situation in the country. Since most of the economic policies affect the disposable income of its citizens, it is true to say that such policies assist normal citizens from the financial burden of hard economic times. There have been many economic policies that have had different results to a nation; while some are considered to have a positive impact there are others whose intentions have been questionable. An illustration of one such country is the United States of America. Regarded as one of the top economies in the world, the US has over the years implemented some policies that have seen the country reach where it is today. There have been some presidents who have developed and implemented some policies which restored the economic conditions of the country to normal or improved the scenario (Bailey, 2015). Among the economic policies that have been passed within the last decade and has had some impact are the American Recovery and Reinvestment Act of 2009. Following the economic recession of 2008, the American Recovery and Reinvestment Act of 2009 was an attempt to implement the Keynesian multiplier effect to restore the situation in the country. The American Recovery and Reinvestment Act of 2009 effectively changed the economic landscape in the US by improving the GDP as well as employment.

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The economic recession of 2008 was devastating in that even a large economy such as the United States was greatly affected. The financial crisis saw a huge number of workers lose their jobs as well as financial institutions not having the ability to provide the credit required to meets the needs of their citizens. There were some series of events that eventually led to the economic crisis in 2008 which is attributed mostly to the private sector. The leading cause was the huge number of mortgages that citizens had that could be attributed to the effect of the Gramm-Rudman Act. The legislation at that time provided an avenue for banks to trade in derivatives which at that time were viewed as being profitable. The same banks sold the derivatives to some investors. One key aspect of the derivatives was that a bank loan or mortgage was required as collateral. Banks provided the mortgages to their customers who were equal to a hundred percent the value of their homes. The relationship resulted in a situation where there was significant demand for mortgages by American citizens. The mortgage securities at the time were owned by banks and other financial institutions (Amadeo, 2019). It reached a point where the securities were sold at lower prices than before making the institutions make losses.

The reaction and first instances of the financial crisis was realized when banks began having restrictions on their lending policies. The new policies saw a reduction in lending to customers as well as other organizations. The reason for the limits in lending was the losses in mortgages that they were experiencing during the time. The lending restrictions were placed not only on citizens but also between different banks. The restrictions on lending to customers as well as between banks made the cost of borrowing to rise making it impossible for different institutions and individuals to receive credit.

The impact of the 2008 financial crisis was one that was felt by both individuals as well as the economy at large. As earlier mentioned, individuals, as well as institutions, had a hard time having access to credit. The lack of credit made it difficult for both individuals and organizations to meet their needs. Individuals had to spend less on household goods while organizations did not have enough cash flow for their operations. Employment was also affected by the financial crisis. Given the difficulties by organizations on their cash flows, many companies retrenched their workers. The unemployment rate in the US rose to levels that had not been witnessed before. Many institutions had to lay off workers to meet their operating costs. Productivity in organizations as well as the entire country reduced. A reduction in productivity affected the overall GDP of the United States.

Following the adverse impact of the financial crisis in 2008, the United States government reacted by introducing the American Recovery and Reinvestment Act of 2009. The policy was introduced as a measure to counter the effects of the financial crisis which the US had not experienced since the great depression. The main form of transformation of the economy relied mostly on spending on the government side. The bill was among the first that President Barack Obama signed and implemented in his first term as the head of state. The implementation of the policy saw nearly $ 1 billion pumped into the economy. The injection into the economy aimed at improving different sectors of the economy such as education, manufacturing, and security.

The implementation of the American Recovery and Reinvestment Act of 2009 was dependent upon the Keynesian multiplier concept. The concept emphasizes three main r aspects relating to the consumer. The multiplier effect is related to the legislation was that the number of resources that the US government injected into the economy could lead to employment opportunities and improved economic performance. Developed by Keynes in the 1930s, the Keynesian concept is based on the fact that the increase in investments results in additional income for consumers. The general equation for the Keynesian multiplier effect is

k = Y/IFrom the equation above, k is the multiplier in the equation, Y represents change or rise in income while I represent the increase in investment. From the equation, it is clear that the ratio representing the increased income to the increase in investment is equal to the multiplier factor (Mukher, n.d.). One would wonder how the multiplier effect works in real life.

An illustration of how the multiplier effect works in real-life is demonstrated by a scenario where the government invests $ 100 million in the manufacturing sector setting up factories. The factories will require employees to work. Hence individuals will be hired to work on the sites. The employees will use nearly 80% of their salaries on different items assuming that the marginal prosperity to consume is 4/5. The consumption rate means that out of the $ 100 million employees receive as income $ 80 million is spent on consumer goods. The suppliers of the consumer goods will spend a further 80% of their income on goods which is equal to $ 64 million. The trend will continue this way for the consumer. In the end, the initial investment of $ 100 million will lead to additional income by the number of times different consumers spend their income.

Following the implementation of the American Recovery and Reinvestment Act of 2009, its impact can be evaluated in two ways; its effect on both the GDP and employment rates in the United States. Following the introduction of the policy, the GDP in the US changed. The first quarter of 2009 there was a decline since the country was still suffering from the effects of the financial crisis from 2008 where the GDP in the US greatly decline. The US economy experienced growth in GDP from 2009 onwards following the additional investments into the economy. The figure below represents the effects on GDP before and after the policy was introduced.

US Department of Commerce: Bureau of Economic Analysis

Employment rates in the United States also following the same trend. During 2008 and 2009 there was significant unemployment in the US. The situation improved from 2010 where new and established industries started to hire employees. The investments by the government created new employment opportunities which in turn led to additional income.

Conclusion

In summary, the United States government has in the past implemented different economic policy. The policies are generally implemented after a crisis where the consumers bear the burden. Following the 2008 financial crisis, the US economy suffered heavily will a reduction in GDP as well as an increase in unemployment levels. The American Recovery and Reinvestment Act of 2009 was introduced to improve the situation in the country. The policy made use of the Keynesian effect where the multiplier effect results in increased income and employment opportunities. Following the results, it is right to say that the policy was a success in the US.

References

Amadeo, K. (2019). 2008 financial crisis. The Balance. Retrieved from https://www.thebalance.com/2008-financial-crisis-3305679

Bailey, T. (2015). Five successful economic policies of US presidents. The New Economy. Retrieved from https://www.theneweconomy.com/strategy/five-successful-economic-policies-of-us-presidents

Executive Office of the President: Council of Economic Advisors. (2013). "The economic impact of the American Recovery and Reinvestment Act of 2009."

Mukher, S. (n.d). Keynes' theory of investment multiplier (with diagram). Economics Discussion. Retrieved from http://www.economicsdiscussion.net/keynesian-economics/keynes-theory/keynes-theory-of-investment-multiplier-with-diagram/10363