Question

Recommend any policy, method, or opinions for the current U.S. unemployment and inflation as a policy maker for either fiscal policy or monetary policy (or both).

Answer 1

The United States saw the worst recession and financial crisis in 2008-09 with the unemployment rate surging to 10% by second half of 2009. Expansionary monetary and fiscal policies during that period helped the US economy to recover from the crisis and it was in December 2015 that the federal reserve increased rates for the first time since the crisis.

Currently, the unemployment rate in the United States is at 3.8%, which is below the unemployment rate seen prior to the financial crisis. At the same time, economic growth is robust and the consumer confidence is at elevated levels. Considering this scenario, the appropriate fiscal policy in the United States is contractionary fiscal policy. This policy involves reducing government purchases and reducing government spending on social security. The reason why contractionary fiscal policy is needed is because the government in the United States has sustained budget deficits and this has translated into higher government debt. With economic growth robust, it is the appropriate time to reduce government spending and deficits. At the same time, it might make sense to increase taxes on the high-income group as it does not impact consumption spending negatively. At the same time, higher taxes can help in reducing deficits and potentially the swelling federal debt.

On the monetary policy front, the federal reserve has already increased interest rates and the fed fund rates are in the range of 2.25% to 2.50%. With inflation subdued and global economic conditions uncertain, the federal reserve has adopted a "wait and watch" policy before any further rate hike. This is the appropriate policy as further tightening of monetary policy can negatively impact growth. Importantly, inflation is low and there are no concerns of high inflation or runaway inflation. Therefore, there is no immediate need to increase rates further and a status-quo can be maintain on the monetary policy front after contractionary policies since December 2015.