Fiscal vs Monetary Policy

"Elect me and I'll revitalize the economy!"  -- Any candidate.

   That promise assumes two things: One, the economy is sick and needs to recover, and Two, a single government official can actually do it.
   Heroic assumptions, at best.
   First question: Can a national economy be managed? Second question: Who can or should do it?
   The first question is often answered yes or no, depending on someone's political leanings. Conservatives will say no, because it's too big, and they believe in free markets, which means no one should try. Left alone, and in the long run the economy will find its own equilibrium.
   Liberals will say yes, it can be managed, and in fact it's a government responsibility to do just that, to even out the inevitable economic cycle and thus protect lower-income workers who suffer during severe downturns.
   So both questions are answered.
   Those who insist that government has no role in an economy ignore the reality that government is one of the major components of an economy, because it spends money on such things as road and bridge construction and maintenance, police, fire and military protection, as well as hiring many thousands of employees to do the work that governments must do. Indeed, without government there is anarchy and chaos.
   How big is government's role? That's accounted for when measuring the size of a national economy, usually in terms of its Gross Domestic Product (GDP), or the value of goods and services produced in the country.
   The other elements include Consumption by homes and businesses, Investment by firms, and net Exports.
   When people delay buying stuff, and firms lower their production because people don't buy as much stuff, it's called a recession. And if the decline is deep enough and long enough, it's called a depression. The problem then becomes, how to induce companies to make more stuff or invest in additional capacity, and to encourage people to buy more stuff.
   There are two classic ways to do this: One is to lower interest rates, which will enable firms to borrow more money to invest in more capacity, and also to allow consumers to borrow more easily so they can buy more stuff.
   That's called monetary policy, which is done by a nation's central bank as it manipulates the money supply. More money available means lower rates, which should stimulate demand.
   Economics 101 -- the Law of Supply and Demand applies to money just as it does to stuff.
   But if cheaper money doesn't do the job of stimulating a slow economy, what's next? That would be fiscal policy, which falls to government. When people and businesses in the private sector stop buying or selling stuff, or delays investing in buildings for increased capacity, government can step in to spend money, hiring people to build bridges, roads, museums, hospitals and do other things that will reduce unemployment and provide wages so workers can buy stuff.
   Currently, the Federal Reserve, America's central bank, has trimmed a key lending rate to near zero in its efforts to stimulate the economy. But it hasn't had enough effect to boost growth to a healthy level. And a political stalemate has prevented the federal government from acting in ways to boost economic growth.
   Meanwhile, some experts on economic trends are warning that if downward trends return, the Fed will have little or no room to kickstart the economy, since its chief strategic weapon -- monetary policy -- is already near zero. Moreover, central banks in a few other nations have put their key rates below zero. The possible consequence will be another international Great Depression, much like the one that preceded World War II.
   At that time, it took massive fiscal policy efforts by the federal government to rescue the nation from economic catastrophe.
   As it is, the low interest rates engineered by the Fed will easily enable the national government to borrow funds to finance new projects, hire workers, pay their salaries, and resolve a difficulty before it becomes a serious problem.
   Assuming, of course, legislators in Washington have the spirit of political cooperation to agree to such a fiscal policy.
   And that, however, could well be another heroic assumption.