Question

The United States has a system in which Fiscal and Monetary policy are independent. Do you prefer this approach to Macroeconomic Policy or would you prefer one group of people controlling both Fiscal and Monetary policy? Justify your answer.

Answer 1

Fiscal Policy:

• It is the set of guidelines that the Government draws for itself so as to reach its desired objectives.
• The aim of the Fiscal Policy is to bring uniformity in the country in terms of growth, development and pertinent issues related to the country.
• The Fiscal Policy talks about the Subsidies, the tax rate , the budget allocation to the states and the Various schemes launched by government.
• The bulk of the focus for these things is to : a) Help the people who are not economically sound to be sufficient enough and b) Give a proper framework for the growth of the country.
• The Fiscal Policy also pays attention to the Expenditure and Spending done by the government in one financial year.
• Typically the government spends for the infrastructure development and in issues that are to support the citizen of the country.
• When the government spends it also earns by the means of taxes. And this is how the Fiscal Policy works.

Monetary Policy:

• The Monetary Policy are drawn by the Central Bank of the country. Here in India we have the Reserve Bank of India as the Central Bank.
• The focus for the Monetary Policy is to : a) Maintain the inflation rate in the country. b) Maintain the stability of interest rates in the country. c) Maintain the exchange rates. And d) provide credit and Inclusion of all the people of the country.
• The Monetary Policy derives both the Quantitative and Qualitative tools for the monitoring and control of the various activities in the market if the economy.
• The Monetary Policy is about setting rates like Repo Rate, Reverse Repo Rate, Bank Rate etc which are used to control the Inflation.
• The Monetary Policy also keeps a check in the Banks and the different markets of the country so as to see that there are no breaching of the rules laid down by the Central Bank.

The Fiscal Policy and the Monetary Policy

• A tight Monetary Policy clubbed with a loose Fiscal Policy will never help the nation because what the Central Bank will restrict the same will be loosen up by the government. For example e.g. Excessive Subsidies given by the government will result in a Fiscal Deficit and ultimately the Government will turn up to Central Bank for loans.
• This will increase the debt on the government that might result in increase tax rates or interest rates.
• A tight Monetary Policy and Fiscal Policy will be suitable for both as two of them work in a tandem complementing each other.
• But it is not necessary for a Fiscal Monetary to be tight. Because in a developing country like India we need to spend more in Capital Expenditure so that we can have a solid infrastructure in which we can bank upon and create more jobs and employment opportunities.

The United States has a system in which Fiscal and Monetary policy are independent.

Monetary policy is based on the idea that the money the government spends must be collected in taxes or must be borrowed from the proceeds of the sale of bonds. WRONG on both counts. All of the money supply is created ex nihilo. Taxes do not pay for anything. Tax income is posted to the payers’ accounts and then annihilated. The government COULD simply create what it spends without borrowing.

fiscal policy, it is WRONG to assume that the sovereign issuer of money must budget scarce resources in the same way that users of the currency must do. The sovereign is not dealing with scarce resources. It creates whatever it spends out of thin air. So when we read or hear about managing “taxpayer money”, that is false. The sovereign can spend whatever it needs to spend without creating any debt and regardless of tax income that is extinguished upon receipt. Read about Modern Monetary Theory.

Independent governance is vastly better, because what travels under the two generalized labels are independent - different objectives, means, and metrics. Fiscal “policy” is not a policy, but a paste-on generalization about government income and expenditure and its year to year growth and change in net (deficit or surplus). The decisions concerning Federal (and, not to be forgotten, state and local income government, which constitute 10% of GDP versus Federal government’s 6%) touch on a huge range of topics, almost none of which are about banking. In contrast, the Federal Reserve deals almost exclusively with banking and private credit; it is a specialist role for a specialist segment of our economic infrastructure. The major intersection of the two is the “full employment” imperative (originating in the“Employment Act of 1946”) in which Congress stopped creating a “Full Employment Budget,” but left the full employment objective to the Federal Reserve, even though the banking system can “accommodate” economic acceleration but cannot get people and entities to save less and spend more. The major problem for all concerned is not “independence” or “dependence,” but that we live in an age of “precision” but the Federal Reserve’s capabilities are highly imprecise (everybody gets higher or lower interest rates, need them or not), while Congress can and does target spending and taxes, but not in an agile, effects-focused way - durable goods sales have been high, services low, but every employee and employer got the same tax decrease or increase

Politicians tend to be shortsighted and would probably sway monetary policy in a way that benefits those who make sizeable contributions towards their campaigns.

The constitution stipulates that the legislative branch has the exclusive responsibility to spend the taxpayers money, and the treasury department, under the executive branch has the exclusive power to print money. Therefore, fiscal policy is a joint venture between Congress and the President. Between them , they can constitutionally spend an unlimited amount of money, issue an unlimited amount of debt and print an unlimited amount of currency.

The United States didn’t have a central bank that could influence monetary policy until the Federal Reserve Act of 1913 was passed. And even today has only limited control over monetary policy. The banking industry, through the Federal Reserve has become a willing accomplice to the federal government’s insatiable appetite for spending ($21 trillion public debt and a 2019 projected budget deficit of over $1 trillion). They are able to accomplish this by being able to create their own currency (Federal Reserve Notes) and by requiring all federal and state chartered banks to maintain reserve requirements with the Fed. This reserve requirement is met by purchasing U.S. Treasury Bonds. Therefore all of the federal debt that isn’t purchased by domestic and international investors is sopped up by the banking industry.

The Federal Reserve is able to influence the amount of money in circulation primarily by using one of two methods. The first is by being able to control the interest rates in which its member banks borrow money from the Fed. And second, by managing the volume of bank reserves in the system, which Paul Volcker did in the late 1970’s.