It’s clear that a solution needs to be found in order to fix the current economic crisis in the United States. There are many potential solutions, but no one has a direct solution. Likely, such a complex problem will require a complex response. It may involve using a number of strategies and theories that people have proposed.
The primary duty for responding to inflation is assigned to the U.S. Federal Open Market Committee (FOMC). The Federal Reserve committee is responsible for setting monetary policy that will help attain the Fed’s goals: stable prices and as much employment as possible. Governments have a few options to aid in decreasing inflation as well. Here are some of the ways they might tackle the issue of inflation.
The first solution is that the government can place a cap on prices. Admittedly, in order to impact inflation at all, the broad price controls needed are immense and have a rather poor record in terms of success and the populace’s reaction. Still, the theory behind it is sound. The government mandates price controls, and they can be placed on any designated good. At the same time, wage controls can also be enacted so that the two controls will work simultaneously to lower inflation.
Another possibility is for governments to establish a contractionary monetary policy that will lower money supply in the economy. The main purpose of contractionary policy is to reduce money supply in the economy. This can be accomplished by increasing interest rates. This will ensure slower economic growth because credit will become more expensive, decreasing consumer and business spending. If there are higher interest rates on government securities, banks and investors will be encouraged to invest in Treasuries instead. Treasuries guarantee a set rate of return that is more appealing to banks and investors than potentially risky equity investments. In turn, all of this combined may reduce inflation.
Another potential monetary policy is raising interest rates. The next objective for the Federal Reserve is beyond keeping control for inflation, that is, to ensure maximum employment. These two objectives have a tricky balance to maintain. They have to be careful about raising interest rates because this can cause hardship for many people, especially those of lower income households. The Fed needs to find a way to allow the maximum amount of jobs, but raising interest rates has the risk of decreasing business revenue because overall prices have gone up. Less business revenue means less jobs.
If governments use fiscal policy they may be able to find a solution to inflation by increasing taxes or cut spending. Increasing taxes will lead to decreased individual demand and reduction in supply of money for the economy. Fiscal policy is often unpopular because raising taxes is not a simple political move. No one wants to hear that taxes will be increased. Even if it would mitigate the problem, it is unlikely to win you much political favor, something that always needs to be taken into consideration.
The most visible government act recently taken to address inflation is the Inflation Reduction Act of 2022 which was signed into law on August 16, 2022 by president of the United States Joe Biden. The plan of this new law is to invest in $369 billion in climate and energy policies, $64 billion to extend the Affordable Care Act that will lower health insurance costs, and also a 15% minimum corporate tax focused on companies that make over $1 billion each year. This Act will have positive effects on small business and supply chain resiliency. It’s expected that the deficit will reduce by more than $300 Billion over a decade, if the $437 billion spending package is established.
Fixing inflation is easier said than done. Currently there are many concerns about going too far or taking action too late when it comes to monetary and fiscal policies. If an economic slowdown unfolds it could lead to job loss and hardship for many people. Fixing inflation requires a lot of time, patience, and multiple strategies if it is to work. We may be on the right track when it comes to fixing inflation, but, with the fear of recession hanging over us, we can never really know for sure how the economy will respond.