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Jérôme Torossian

Dr. Frendreis

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February 23, 2016

The U.S Government Involvement in the Economy

The United States of America is a big, young, and prosperous nation that has successfully

gained its independence from the British Empire in the eighteenth century. During the end of the

nineteenth century, the industries of the United States were far more productive than those

located in Britain; the most powerful country of the time. After the First World War, despite the

fact that it was most of President Woodrow Wilson’s work to promote and establish the League

of Nations, the United States decided not to join the organization fearing that it might harm its

national economy. However, its role played in defeating the Axis powers in WWII, the

strengthening of its economy, and the critical position of Europe and Japan, made the country

stop its isolationist policy, and send aid through its marshal plan. Later, the United States and the

Soviet Union became part of a long tensional conflict known as the Cold War. It is after the

dissolution of the Soviet Union in 1991 that the United States became the leading world power.

If there is a primary sector that not only summarizes but also symbolizes well the American

hegemony, it is of course through its national economy. In fact, the government of a country

actually has a crucial role to play in the well-being of its economy. In this brief essay, I will

mainly talk about the different levels of government intervention that occurred over time in the

U.S economy. In addition, I will argue on what I believe the U.S government should and should

not do with respect to its national economy, and I will demonstrate how my proposals might

actually help to better achieve important economic goals in the future.

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Historically, the U.S government policy towards its economy began with the economic

system known as laissez-faire, which in French means “leave it alone.” This concept was

popularized by Adam Smith in 1776, and it was developed mainly due to mercantilism. The

whole idea of laissez-faire is that private businesses should be free from government intervention

so that individual’s actions can follow their own self-interest in a competitive market. He thought

that this would help the country’s economy and that it will benefit the greater good of the

society. However, Smith still gave the government some work to perform, such as to safeguard

international trade or to administer justice.

The laissez-faire concept was able to stay in power until 1936 when John Maynard

Keynes presented his revolutionary idea known as Keynesianism. Keynes advocated that the

government increases aggregate demand, either by increasing federal spending or lowering taxes

in order to stimulate demand. He argued that the government should increase the budget deficit if

the unemployment rate was high. In terms of inflation, he proposed to increase taxes or lower

government spending. Franklin D. Roosevelt introduced some domestic programs known as the

New Deal in response to the Great Depression. He asked for a relief for the unemployed, a

recovery from the economic contraction, and a reform of the financial system. In 1934, around

28 million U.S citizens received a federal relief. By the end of the 1930s, government

intervention in the economy increased even more with the creation of the Federal Deposit

Insurance Corporation, which guarantees bank deposits; the 1935 Social Security Act, which

established old-age benefits; or the Fair Labor Standards Act of 1938, which created minimum

wages and maximum hours for workers. Keynesianism was accepted in the U.S, yet, it was not

fully embraced until the Employment Act of 1946 was signed by Truman. This act not only gave

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the president the responsibility to manage the economy, but it also created other offices like the

Council of Economic Advisers or the Joint Economic Committee.

In 1950, Milton Friedman developed a new school of thought known as monetarism,

which challenged the Keynesian theory. It advocates strict control of the money in circulation so

to achieve a balance with the goal of preventing inflation. Monetarists also think that increase in

the money supply should stay constant at around 3% to 4% yearly. This economic theory gained

popularity after bringing down both unemployment and inflation in the 1970s. During that

period, another sign of U.S government intervention in the economy was through the Full

Employment and Balanced Growth Act of 1978. Indeed, the act requires the Federal Reserve to

create a monetary policy that keeps constant growth, lowers inflation, and promotes price

stability. Furthermore, the president has to make goals for the economy for the upcoming fiscal

year, and both the president and Congress are responsible for balancing the budget.

In the 1970s, another economic theory known as supply-side economics came up in

response to Keynesian thoughts. People who follow this theory believe that the supply of goods

and services, as well as money and labor, establishes demand. To boost economic growth,

supply-siders think that lowering marginal income tax rates on individuals and businesses is the

best way. This system was pushed by Donald Reagan in order to fight against stagflation, which

is a period of economic growth and high inflation. In 1981, Reagan endorsed the Kemp-Roth

Bill, which lowered individual and business income taxes by 30%.

In order to increase the economy, I argue that the government should stop its war on

drugs. In fact, the government spent on this war over $15.6 billion in 2011, and I think this is a

large amount of money that is wasted on an ineffective struggle. Bernie Sanders even declares

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that it is a failed policy and that he supports the decriminalization of marijuana. Legalizing and

regulating marijuana would not only make the government save money but also gain benefits as

it can generate large revenues. In fact, Jeff Miron, a professor of economics at Harvard,

emphasized that taxing and regulating marijuana would yearly bring $10 to $14 billion to the

government. The legalization and regulation of marijuana could be a good way to increase

employment, gain money, reduce the number of nonviolent drug offenders in prison, and even

fund useful public investment projects.

However, I believe that the government should stop spending too much on the military as

it affects the economy. In fact, the military spending in 2015 represented 54% of all federal

discretionary spending, which is around $598.5 billion. To put it into perspective, the United

States spent in 2015 more than the next 9 big military spenders combined. In my view, this is

plenty of money spent for a country that is not challenged by any superpower. For instance,

China is the second military spender, and this country spent only $145 billion in 2015. The

government should reduce its military spending and shift the money saved in different sectors,

such as in education, health, or domestic infrastructure. As the money put aside would still be

spent, a cut in the military budget would have no effect on the economy, and the United States

would still have the most powerful and largest army in the world.

The government has definitely a role to play in a nation’s economy. Indeed, the role of

government is to maintain economic growth, full employment, price stability, and a positive

balance of international trade. It is the government’s job to not only protect the people from

external issues but also internal ones, such as the economy. It would be wrong to say that

government involvement is always useful; however, its intervention helps to lead the economy

along a path that is beneficial to the society as a whole.

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Bibliography

Dolan, Chris; Frendreis, John; Tatalovich, Raymond. The Presidency and Economic Policy.

Rowman & Littlefield, 2008. Print.

Lehne, Richard. Government and Business: American Political Economy in Comparative

Perspective. CQ Press, 2012, 3rd edition. Print.

Radcliffe, Brent. Monetarism: Printing Money To Curb Inflation. Investopedia. Web. 18 Feb.

2016.

Wong, Edward; Buckley, Chris. China’s Military Budget Increasing 10% for 2015, Official says.

The New York Times, 2015. Web. 19 Feb. 2016.

https://www.nationalpriorities.org/campaigns/military-spending-united-states/ - Military

Spending in the United States. Web. 19 Feb. 2016.

https://www.nationalpriorities.org/campaigns/us-military-spending-vs-world/ - U.S. Military

Spending vs. the World. Web. 19 Feb. 2016.

www.prohibitioncosts.org - Milton Friedman, 500+ Economists Call for Marijuana Regulation

Debate. Web. 19 Feb. 2016.

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