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The Effects of the Government on the Economy

The Effects of the Government on the Economy

Producers and consumers normally make the majority of the decisions which mold the American economy. On the other hand, the government contains a strong influence towards the American economy. This normally occurs in four main areas. To begin with, the federal government provides guidance to the whole pace of the economic activity. It attempts to keep a steady growth, stability of prices and increased employment levels. The government normally performs various actions to either increase or reduce the growth rate of the economy. These actions include adjusting both taxation rates and spending. This is called the fiscal policy. The government can also manage the supply of money and control credit use using monetary policy (Fishback 208).

In addition, it can also reduce or decrease the growth rate of the economy through the process influencing the levels of employment and prices. For a long period after the Great Depression of the 1930s, recessions were taken as the biggest threat to the economy. With the increase in the danger as a result of recession, the federal government came forward to strengthen the economy. This was by means of heavy spending on itself. Additionally, it reduced taxes for consumers to spend a lot. It also fostered an increased growth in the supply of money which also stimulated increased spending. Also, within the 70s, there was a massive increase in prices of various basic commodities such as energy. Hence, it created increased inflation fear. Consequently, the leaders of the federal government started to concentrate a lot on combating inflation. Thus, it concentrated less in controlling recession. In the control of inflation, the government limited its spending, cut taxes, and reined in growth in the supply of money. As time moved, concepts concerning the favorable instruments to stabilize the economy became altered. The federal government had a lot of belief in the fiscal policy. This is because both the taxes and spending are under the control of the Congress and the president. This pair of elected officials plays a major role in determining the direction the economy takes. During periods of high inflation, increased unemployment and massive deficits by the government normally makes the fiscal policy weaken as a measure of regulating the overall performance of the economy. Rather, the use of the monetary policy during such periods controlled the economy. Monetary policy is normally directed by the Federal Reserve Board with some independence from both the Congress and the president (Fishback 128).

The American economy is normally driven by a consumer-based society plus citizenry driven by capitalism. Hence, it is essential to comprehend and interpret the role played by the federal government in the various economic operations of the nation. On the historic basis, the level at which the federal government has participated in the economic structure of the country has come up with variations in the well-being and outlook of the American citizens. The government plays a key role in obtaining and distribution of money within the society.

Conclusively, both the government and the economy depend on each other. For example, when the federal government reduces its participation in various social services, a personalized, privatized and a society with less social responsibility arises. On the contrary, with the rise in taxation coupled with a lot of government control on given attributes of social services, a difficulty arises on the mode of distribution of money from coffers. However, the most significant idea is for the American economy to grow strong. Some people even believe that reduced government taxation will make the buying power of citizens to increase. Hence, it will result in profits in various businesses to increase. In addition, other groups of people believe the government should utilize American tax dollars to finance various enterprises in order to come up with a stable and a strong economy containing reduced cases of collapse and overproduction. The good thing is that both the schools of thought produce given impacts on both the economy and the mindset of all the citizens of America.


Fishback, Price. Government and the American Economy: A New History. Chicago: University of Chicago Press, 2007. Print.

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