Majority of central bankers want the developed economies to improve government spending to pull the global economy out of recession. In the US, the government spending on services and goods as a percentage share of the economy has reduced to a historic low. Investment and consumption by federal, local and state governments combined dropped by 17.6 % of the GDP in the current quarter (Heisse, 2016). According to the Commerce Department, it is one of the lowest in 66 years. Besides, the demographic changes have increased government transfer payment to various individuals. If the trend continues, it may have a negative impact on Excel Connections, a manufacturer of electromechanical panels, lead wires, heavy gauge cables, wire harnesses, power cables, cable assemblies, fiber optics, ribbon cables, and coaxial cables. The paper will seek to analyze how the reduced government spending may affect Excel Connections.
There have been clashes regarding how the government spending is playing out globally that has deepened the worries that the country is relying on an overburdened monetary policy. The heated debate has been a focus for the 20 leading economies, and the International Monetary Fund has also been keen on the issue. The Fed officials and the central banks had been forced to reduce the interest rates and began a series of asset purchases to encourage economic expansion. Reduced interest rates could have a positive impact on Excel connections because of low-interest loans (Heisse, 2016). Janet Yellen, Fed Chairwoman, argued that the monetary policy in advanced economies such as the US have been under a substantial burden without assistance from the fiscal policies (Heisse, 2016). However, the fiscal policy makers argue that they have been working hard to reduce debt loads after they had increased during the recession.
Delegate your assignment to our experts and they will do the rest.
In the US, the current public debt is at 75 % of the total economic output, and there has been a lot of pressure to reduce spending (Heisse, 2016). If government spending is reduced, Excel connection may have lower sales compared to previous years. George Osborne, the UK Chancellor of the Exchequer, has vowed to have a budget surplus by 2020. Furthermore, Eurozone governments are resisting spending boosts and policy changes that have been advised by the European Central banks. The decline of government spending in the US exhibits the challenges that exist while trying to resolve the standoff between fiscal and monetary policy makers at a period of political tension and elections. Reduced government spending may have negative impacts on various businesses such as Excel connections that are dependent on the government spending on infrastructure and utilities.
The aging population in the US has been burdening the public pension programs and raised fears that the future labor force may be inadequate to pay the current debts (Heisse, 2016). The drop in government spending has been accompanied by an increase in the automatic transfer payments in programs such as Medicare, Social Security, and other federal and state benefits. As the US population ages, the programs that were named will take up a higher share of government spending, therefore, boosting the government debt in the process. Two decades ago, transfer payments made up 11.4% of the GDP but made up 15% of the GDP in the 2015 fourth quarter (Heisse, 2016). Transfer payments have replaced other types of spending and changed the relationship between the citizens and government.
Currently, the policy makers are in a dilemma, aiming to boost spending on education and infrastructure without increasing the government debt to unmanageable levels. However, a huge chunk of public money is spent on retirement programs. Increasing the government investment on education and infrastructure will lay a foundation for better productivity and stronger economic growth in the long run especially for businesses such as Excel Connection who rely heavily on government spending. If the government debt continues increasing, it will crowd out the private investment, therefore, reducing the money that is available for various businesses to invest (Heisse, 2016). Hence, the government needs to control the increase in transfer payments. Some economists argue that if the country did not have a generous Social Security Benefit, the workers would have resorted to saving on their own. It would have led to larger capital stock, less implicit debt and higher investments in bonds and stocks.
Nevertheless, monetary policies can also become inefficient if corporates fail to increase their capital spending as a response to the declining interest rates and the growing liquidity. The economic uncertainty can influence an investment trap where most of the investors adopt the wait and see approach. It is important to realize that a transition of monetary stimulus into various economic activities is not based on reliable and stable economic relationships (Heisse, 2016). A generous supply of liquidity and low interest rates may drive up the asset prices such as real estate, equities, and bonds. The gains can only be sustainable if the US real economy improves simultaneously. Otherwise, the liquidity boom on the existing stock markets may implode. For instance, earlier in the year when negative news regarding the US and Chinese economies led to a crash on the global stock markets.
Furthermore, the US monetary policy is dependent on the credit channel. If households and businesses are unwilling to spend, the impact of the monetary policy will be diminished. The liquidity may end up remaining in the banking industry rather than flowing into the real economy. If such a situation occurs, the additional liquidity or negative interest rates will not restore full employment (Heisse, 2016). The country requires further steps such as spending on infrastructure, improved liberalization and regulation of markets to enhance job creation, and tax incentives to boost the business investment. The country has had years of monetary easing, and it is obvious that it needs to shift to the policies that have been proposed. The monetary policies require being rethought because there are cracks in the transition mechanisms.
If the government increases it is spending on infrastructure that boosts productivity and gives tax incentives to businesses such as Excel Connections, the economy will improve. Excel Connections will have better sales that may even create more jobs. The negative interest rates may not spur growth in investors are unwilling to spend because of the glaring uncertainties. The government needs to check its public debt so that it may not crowd out private investors from investing in the economy. A majority of advanced economies are keen to reduce government spending, but without proper monetary policies, the spending cuts may hurt businesses such as Excel connections (Heisse, 2016). Central banks do not have the power to influence inflation and economic growth at all times. If the US desires to attain a stable equilibrium and full employment, the government must improve the monetary policy.
Reference
Heisse, M. (2016). Hitting the Limits of Monetary Policy the Wall Street Journal http://www.wsj.com/articles/hitting-the-limits-of-monetary-policy-1458236689
