The U.S. Government’s Role in the Economy

Despite Adam Smith’s suggestion of the “invisible hand” that guides a capitalist economy always keeping it in balance, the U. S. government plays a considerable role in regulating the economy. The main way in which the U. S. government influences the economy is through the money supply. The treasury department controls the amount of capital in the system and available for investment, through a variety of methods. The economy is also influenced heavily through taxes, which can affect both consumer buying and business investment decisions.

Finally, certain industries are regulated by the government in order to control their price range, availability, and quality of services. This paper will discuss all of these methods by which the U. S. government attempts to control the U. S. economy to prevent inflation, recession, and trade imbalance. The treasury department’s regulation of the money supply is the main way in which the U. S. government affects the economy. Control is exercised in a few key ways, the main main two of which are described below. First, the treasury regulates the actual amount of printed currency circulating in the U. S economy.

The effect of this seems pretty simple until one considers the velocity of money. The velocity of money is how one dollar in the economy can create much more than its value in investment funds, which leads us into the second way the treasury controls the economy. The treasury sets percentages of their total “holdings” that each bank must keep in reserve with the government. This is a preventative measure to protects against runs on banks and over lending amongst other things, but also equally importantly allows the treasury to affect the money supply in a much more dramatic way than just the amount of printed capital.

An example will make this much clearer: Consider that a bank has total holdings of one billion dollars ($1,000,000,000). If the treasury requires the bank to keep 10% of this in a treasury account at all times then the bank is able to lend out $900,000,000 for investment, this greatly increases the amount of money available in the economy and is called the velocity of money. Now consider the idea that all of a sudden the treasury drops the requirement to 9%, this makes another $10,000,000 available in the economy from just that bank. Essentially the treasury is able to control the entire U. S.

money supply and therefore economy simply through administrative regulations. Taxes are the second main way in which the U. S. government controls the economy, not just the money within it, but people’s buying habits. By taxing things they don’t want people to do and offering deductions or credits for things they do want, consumers and investors can be influenced. The 2006 energy efficiency credits are an excellent example of this. If you were to have put in certain energy saving equipment into your house at the appropriate times as to meet the requirements of the credits, you could get hundreds of dollars off your taxes.

This made it less expensive, and therefore easier for people to put in things such as central air, solar panels, or a number of other items. People rarely consider how much their lives are effected by taxation unless they are in business or doing their taxes, but taxation’s effect is a major part of most U. S. citizens lives. Industry regulation is the final major method of control the U. S. government uses to influence the economy. Industry regulation is where the government sets prices and prevents competition in certain industries.

One of the best examples of this are utilities, such as electricity and gas. In many states, competition is prevented and prices are set in the hope of providing better more reliable services to consumers at the lowest cost. Pretty much everyone needs power, sometimes to say alive, so discount companies that offer unreliable service at low rates would be unacceptable. To prevent these sorts of problems the government regulates the industry. Since a regulated industry goes against the foundation of our capitalist economy, many people are often opposed to regulation.

Some issues around this will be discussed below. Many people believe firmly in the “invisible hand” or at least that in a capitalist economy the people are able to resolve problems themselves. This leads to opposition of much government regulation in the economy. Most people either accept or do not understand the treasury departments control of the money supply, so this often is not so heavily scrutinized, at least in public opinion, but taxation and regulation can be very heated issues. People take taxes very personally, and political campaigns are won and lost on taxation issues.

Take for example sales tax. Many people, including myself, do not feel they should have to pay sales tax since their income itself is already taxed. This leads to certain states not having sales tax, and others offering “tax-free” days. While this is a state, not federal, issue, it is a very important one. Another area where people often oppose government intervention in the economy is with industry regulation. A capitalist system should not be “uncapitalized” by having the government prevent real competition in an industry.

I and many others, feel that the government should never regulate any industry, and either run it or let it run free. Conversely, some industries and products that are not really regulated or controlled enough should be more. The American airline industry was regulated until the late ‘70’s, and now is totally flopping, with horrible service and high rates. I feel that the airline should be run entirely by the government, like in many countries. This would allow air transport without the need for profits. Another issue where I think the government needs to play a deeper role in the economy is the taxation of income.

I think that after about $200,000 of income people should only get about $0. 10 on any further income to prevent the massive disparity in U. S. quality of life. In conclusion, the government plays a much deeper role in the economy than most free market proponents would have you think. Most of the “invisible hand” is actually the government trying to keep the economy stable. The reality is that because the government is so entwined in the economy they need to regulate it to some degree, sometimes just as a means of enforcing laws and providing security to their citizens.