Business Studies
Analyze 1 of the following government intervention programs:
• Countercyclical fiscal policies (countering economic disruptions such as the housing bubble and the Great Recession)
• US agriculture support programs
• Assistance for Low Income Families (choose 1)
• Housing vouchers
• Earned Income Tax Credit (including Child Tax Credit)
• Supplemental Nutrition Assistance Program (SNAP)
• Low income healthcare (choose 1)
• Medicaid (including Children’s Health Insurance Program).
• Affordable Care Act expansion
• Social insurance programs (choose 1)
• Old Age, Survivors, and Disability Insurance (OASDI)
• Medicare
• Unemployment insurance
Write a 700- to 1,050-word summary of your analysis. Identify the intervention and the market failure leading up to the intervention. Complete the following in your paper:
• Analyze the arguments for government intervention as opposed to arguments for market-based solutions. Hint: See the information about market failures.
• Examine who has been helped and who has been hurt by the selected government intervention.
• Examine externalities and unintended consequences of such intervention. For example, consider whether the SNAP program and health coverage for low-income families result in higher future tax revenues because low-income children grow up healthier and produce higher incomes over their lifetimes.
• Analyze whether cost of the intervention you selected as a share of GDP or the number of participants is increasing, decreasing, or varies with the state of the economy, based on the cost trend(or number of participants) since its inception or since 2000.
• Analyze credible economists’ opinions on the success or failure of the intervention that you chose in achieving its objectives.
• Recommend whether the program should be continued as is, discontinued, or modified based on your conclusions. Defend your recommendation.
Note: Use of charts and graphs is encouraged with appropriate citations. Any charts or graphs retrieved from the Federal Reserve Bank of St. Louis FRED website may only be included when the data sources used by FRED are US government sources such as the Bureau of Economic Analysis or the Bureau of Labor Statistics.
Cite at least 2 academically credible sources.
Format your assignment according to APA guidelines.
Submit your assignment.
ANSWER
This essay focuses on countercyclical fiscal policies through government intervention programs directed as countering economic disruptions such as the housing bubble and the Great Recession.
The housing bubble was a factor that contributed to the Great Recession in the year 2007. Government intervention was in the form of the Federal Reserve Monetary Policy where actions are activated towards the promotion of various factors of the market such as stable market prices, maximum employment and moderate interest rates among others. As a corrective measure, the government through the Federal Reserve “provided liquidity and support through a range of programs motivated by a desire to improve the functioning of financial markets and institutions, and thereby limit the harm to the US economy” (Federal Reserve History).
In response to the housing bubble, the Federal Reserve supported specific financial institutions through the process of quantitative easing where the money is injected into the economy with the idea to expand economic activity. The Federal Reserve achieved this by a reduction of the reserve holdings of treasury security to reduce reserves belonging to banks and by this driving the federal funds rate low. According to experts, government intervention, in this case, was warranted and the only way to handle the crisis when the bubble burst. The intervention was a direct influence on demand and supply of money through the use of interest rates.
The interference was not good for banks. They were allowed limited lending which caused a mismatch between their short term obligation and their long term desire which easily became catastrophic. However large subsidies to mortgage interest prevented more people from losing their homes and therefore the intervention was an aid to those with mortgage payment during the housing crisis.
Figure 1.1: Overview of monetary versus fiscal policy
Source: https://www.economicshelp.org/wp-content/uploads/2010/06/monetary-vs-fiscal-policy.png
The unintended consequences of this whole scenario were mostly in how people analysed risk, in particular, real estate. Homeowners with variable mortgage payments begun to understand the proportionate effect making the housing industry a very volatile industry. On the microeconomic environment, the intervention of interest increments affected the exchange rates where the dollar rose and therefore a cost on exporters. On the positive side, people who save gained more income showing that fact that this intervention had borrowers and savers affected differently. Similarly, the Federal Reserve monetary policy affects the components of GDP including consumption, investment, government spending and net exports.
The program of Federal Reserve from analysis should continue although with severe modifications and updates to keep up with the constantly changing microeconomic environment of the United States.
References
Sutherland, D., et al. (2010), “Counter-cyclical Economic Policy”, OECD Economics Department Working Papers, No. 760, OECD Publishing, Paris, https://doi.org/10.1787/5kmfw36tj97h-en.
Federal Reserve History. The Great Recession and its Aftermath. Retrieved on 20th July 2020 from https://www.federalreservehistory.org/essays/great_recession_and_its_aftermath
