Trends in Fiscal Policy of India Essay Example for Free

Trends in Fiscal Policy of India Essay ABSTRACT This essay traces the major developments in India’s fiscal policy from the early stages of planned development in the 1950s, through the country’s balance of payments crisis of 1991, the subsequent economic liberalisation and rapid growth phase, the response to the global financial crisis of 2008 and the recent post-crisis moves to return to a path of fiscal consolidation. The initial years of India’s planned Development strategy were characterised by a conservative fiscal policy whereby deficits were kept under control. The tax system was geared to transfer resources from the private sector to fund the large public sector driven industrialization process and also cover social welfare schemes. However, growth was anaemic and the system was prone to inefficiencies. In the 1980s some attempts were made to reform particular sectors. But the public debt increased, as did the fiscal deficit. India’s balance of payments crisis of 1991 led to economic liberalisation. The reform of the tax system commenced. The fiscal deficit was brought under control. When the deficit and debt situation again threatened to go out of control in the early 2000s, fiscal discipline legalisations were instituted. The deficit was brought under control and by 2007-08 a benign macro-fiscal situation with high growth and moderate inflation prevailed. During the global financial crisis fiscal policy responded with counter-cyclical measures including tax cuts and increases in expenditures. The post-crisis recovery of the Indian economy is witnessing a correction of the fiscal policy path towards a regime of prudence. In the future, the focus would probably be on bringing in new tax reforms and better targeting of social expenditures. INTRODUCTION Fiscal policy is the means by which a government adjusts its levels of spending in order to monitor and influence a nations economy. It is the sister strategy to monetary policy with which a central bank influences a nations money supply. These two policies are used in various combinations in an effort to direct a countrys economic goals. Here we take a look at how fiscal policy works, how it must be monitored and how its implementation may affect different people in an economy. Fiscal policy deals with the taxation and expenditure decisions of the government.Monetary policy, deals with the supply of money in the economy and the rate of interest.These are the main policy approaches used by economic managers to steer the broad aspects of the economy. In most modern economies, the government deals with fiscal policy while the central bank is responsible for monetary policy. Fiscal policy is composed of several parts. These include, tax policy, expenditure policy, investment or disinvestment strategies and debt or surplus management. Fiscal policy is an important constituent of the overall economic framework of a country and is therefore intimately linked with its general economic policy strategy. For example, if taxes were to increase, consumers would have less disposable income and in turn would have less money to spend on goods and services. This difference in disposable income would go to the government instead of going to consumers, who would pass the money onto companies. Or, the government could choose to increase government spending by directly purchasing goods and services from private companies. This would increase the flow of money through the economy and would eventually increase the disposable income available to consumers. Unfortunately, this process takes time, as the money needs to wind its way through the economy, creating a significant lag between the implementation of fiscal pol icy and its effect on the economy. In broad term fiscal policy refers to that segment of national economic policy which is primarily concerned with the receipts and expenditure of central government. The importance of fiscal policy is high in underdeveloped countries. The state has to play active and important role. In a democratic society direct methods are not approved. So, the government has to depend on indirect methods of regulations. In this way, fiscal policy is a powerful weapon in the hands of government by means of which it can achieve the objectives of development. BASIC CONCEPTS : A spending item is a capital expenditure if it relates to the creation of an asset that is likely to last for a considerable period of time and includes loan disbursements. Such expenditures are generally not routine in nature. By the same logic a capital receipt arises from the liquidation of an asset including the sale of government shares in public sector companies (disinvestments), the return of funds given on loan or the receipt of a loan. This again usually arises from a comparatively irregular event and is not routine. In contrast, revenue expenditures are fairly regular and generally intended to meet certain routine requirements like salaries, pensions, subsidies, interest payments, and the like. Revenue receipts represent regular earnings for instance tax receipts and non-tax revenues including from sale of telecom spectrums. There are various ways to represent and interpret a government’s deficit. The simplest is the revenue deficit which is just the difference between revenue receipts and revenue expenditures. Revenue Deficit = Revenue Expenditure – Revenue Receipts (that is Tax + Non-tax Revenue) A more comprehensive indicator of the government’s deficit is the fiscal deficit. This is the sum of revenue and capital expenditure less all revenue and capital receipts other than 6loans taken. This gives a more holistic view of the government’s funding situation since it gives the difference between all receipts and expenditures other than loans taken to meet such expenditures. Fiscal Deficit = Total Expenditure (that is Revenue Expenditure + Capital Expenditure) –(Revenue Receipts + Recoveries of Loans + Other Capital Receipts (that is all Revenue and Capital Receipts other than loans taken)) â€Å"The gross fiscal deficit (GFD) of government is the excess of its total expenditure, current and capital, including loans net of recovery, over revenue receipts (including external grants) and non-debt capital receipts.† The net fiscal deficit is the gross fiscal deficit reduced by net lending by government (Dasgupta and De, 2011). The gross primary deficit is the GFD less interest payments while the primary revenue deficit is the revenue deficit less interest payments. ARCHITECTURE: The Indian Constitution provides the overarching framework for the country’s fiscal policy. India has a federal form of government with taxing powers and spending responsibilities being divided between the central and the state governments according to the Constitution. There is also a third tier of government at the local level. Since the taxing abilities of the states are not necessarily commensurate with their spending responsibilities, some of the centre’s revenues need to be assigned to the state governments. To provide the basis for this assignment and give medium term guidance on fiscal matters, the Constitution provides for the formation of a Finance Commission (FC) every five years. Based on the report of the FC the central taxes are devolved to the state governments. The Constitution also provides that for every financial year, the government shall place before the legislature a statement of its proposed taxing and spending provisions for legislative debate an d approval. This is referred to as the Budget. The central and the state governments each have their own budgets. The central government is responsible for issues that usually concern the country as a whole like national defense, foreign policy, railways, national highways, shipping, airways, post and telegraphs, foreign trade and banking. The state governments are responsible for other items including, law and order, agriculture, fisheries, water supply and irrigation, and public health. Some items for which responsibility vests in both the Centre and the states include forests, economic and social planning, education, trade unions and industrial disputes, price control and electricity. There is now increasing devolution of some powers to local governments at the city, town and village levels. The taxing powers of the central government encompass taxes on income (except agricultural income), excise on goods produced (other than alcohol), customs duties, and inter-state sale of goods. The state governments are vested with the power to tax agricultural income, land and buildings, sale of goods (other than inter-state), and excise on alcohol. Besides the annual budgetary process, since 1950, India has followed a system of five-year plans for ensuring long-term economic objectives. This process is steered by the Planning Commission for which there is no specific provision in the Constitution. The main fiscal impact of the planning process is the division of expenditures into plan and non-plan components. The plan components relate to items dealing with long-term socioeconomic goals as determined by the ongoing plan process. They often relate to specific schemes and projects. Furthermore, they are usually routed through central ministries to state governments for achieving certain desired objectives. These funds are generally in addition to the assignment of central taxes as determined by the Finance Commissions. In some cases, the state governments also contribute their own funds to the schemes. Non-plan expenditures broadly relate to routine expenditures of the government for administration, salaries, and the like. While these institutional arrangements initially appeared adequate for driving the development agenda, the sharp deterioration of the fiscal situation in the 1980s resulted in the balance of payments crisis of 1991, which would be discussed later. Following economic liberalization in 1991, when the fiscal deficit and debt situation again seemed to head towards unsustainable levels around 2000, a new fiscal discipline framework was instituted. At the central level this framework was initiated in 2003 when the Parliament passed the Fiscal Responsibility and Budget Management Act (FRBMA). Taxes are the main source of government revenues. Direct taxes are so named since they are charged upon and collected directly from the person or organization that ultimately pays the tax (in a leg al sense).Taxes on personal and corporate incomes, personal wealth and professions are direct taxes. In India the main direct taxes at the central level are the personal and corporate income tax. Both are till date levied through the same piece of legislation, the Income Tax Act of 1961. Income taxes are levied on various head of income, namely, incomes from business and professions, salaries, house property, capital gains and other sources (like interest and dividends).Other direct taxes include the wealth tax and the securities transactions tax. Some other forms of direct taxation that existed in India from time to time but were removed as part of various reforms include the estate duty, gift tax, expenditure tax and fringe benefits tax. The estate duty was levied on the estate of a deceased person. The fringe benefits tax was charged on employers on the value of in-kind non-cash benefits or perquisites received by employees from their employers. Such perquisites are now largely taxed directly in the hands of employees and added to their personal income tax. Some states charge a tax on professions. Most local governments also charge property owners a tax on land and buildings. Indirect taxes are charged and collected from persons other than those who finally end up paying the tax (again in a legal sense). For instance, a tax on sale of goods is collected by the seller from the buyer. The legal responsibility of paying the tax to government lies with the seller, but the tax is paid by the buyer. The current central level indirect taxes are the central excise (a tax on manufactured goods), the service tax, the customs duty (a tax on imports) and the central sales tax on inter-state sale of goods. The main state level indirect tax is the post-manufacturing (that is wholesale and retail levels) sales tax (now largely a value added tax with intra-state tax credit). The complications and economic inefficiencies of this multiple cascading taxation across the economic value chain (necessitated by the constitutional assignment of taxing powers) are discussed later in the context of the proposed Goods and Services Tax (GST). EVOLUTION (TILL 1991) India commenced on the path of planned development with the setting up of the Planning Commission in 1950. That was also the year when the country adopted a federal Constitution with strong unitary features giving the central government primacy in terms of planning for economic development (Singh and Srinivasan, 2004). The subsequent planning process laid emphasis on strengthening public sector enterprises as a means to achieve economic growth and industrial development. The resulting economic framework imposed administrative controls on various industries and a system of licensing and quotas for private industries. Consequently, the main role of fiscal policy was to transfer private savings to cater to the growing consumption and investment needs of the public sector. Other goals included the reduction of income and wealth inequalities through taxes and transfers, encouraging balanced regional development, fostering small scale industries and sometimes influencing the trends in econ omic activities towards desired goals (Rao and Rao, 2006). In terms of tax policy, this meant that both direct and indirect taxes were focussed on extracting revenues from the private sector to fund the public sector and achieve redistributive goals. The combined centre and state tax revenue to GDP ratio increased from 6.3 percent in 1950-51 to 16.1 percent in 1987-88.For the central government this ratio was 4.1 percent of GDP in 1950-51 with the larger share coming from indirect taxes at 2.3 percent of GDP and direct taxes at 1.8 percent of GDP. Given their low direct tax levers, the states had 0.6 percent of GDP as direct taxes and 1.7 percent of GDP as indirect taxes in 1950-51. The government authorised a comprehensive review of the tax system culminating in the Taxation Enquiry Commission Report of 1953. However, the government then invited the British economist Nicholas Kaldor to examine the possibility of reforming the tax system. Kaldor found the system inefficient and inequitable given the narrow tax base and inadequate reporting o f property income and taxation. He also found the maximum marginal income tax rate at 92 percent to be too high and suggested it be reduced to 45 percent. In view of his recommendations, the government revived capital gains taxation, brought in a gift tax, a wealth tax and an expenditure tax (which was not continued due to administrative complexities) (Herd and Leibfritz, 2008). Despite Kaldor’s recommendations income and corporate taxes at the highest marginal rate continued to be extraordinarily high. In 1973-74, the maximum rate taking in to account the surcharge was 97.5 percent for personal income above Rs. 0.2 million. The system was also complex with as many as eleven tax brackets. The corporate income tax was differential for widely held and closely held companies with the tax rate varying from 45 to 65 percent for some widely held companies. Though the statutory tax rates were high, given a large number of special allowances and depreciation, effective tax rates were much lower. The Direct Taxes Enquiry Committee of 1971 found that the high tax rates encouraged tax evasion. Following its recommendations in 1974-75 the personal income tax rate was brought down to 77 percent but the wealth tax rate was increased. The next major simplification was in 1985-86 when the number of tax brackets was reduced from eight to four and the highest income tax rate was brought down to 50 percent. In indirect taxes, a major component was the central excise duty. This was initially used to tax raw materials and intermediate goods and not final consumer goods. But by 1975-76 it was extended to cover all manufactured goods. The excise duty structure at this time was complicated and tended to distort economic decisions. Some commodities had specific duties while others had ad valorem rates. The tax also had a major †cascading effect‟ since it was imposed not just on final consumer goods but also on inputs and capital goods. In effect, the tax on the input was again ta xed at the next point of manufacture resulting in double taxation of the input. Considering that the states were separately imposing sales tax at the post-manufacturing wholesale and retail levels, this cascading impact was considerable. The Indirect Tax Enquiry Report of 1977 recommended introduction of input tax credits to convert the cascading manufacturing tax into a manufacturing value added tax (MANVAT). Instead, the modified value added tax (MODVAT) was introduced in a phased manner from 1986 covering only selected commodities. The other main central indirect tax is the customs duty. Given that imports into India were restricted, this was not a very large source of revenue. The tariffs were high and differentiated. Items at later stages of production like finished goods were taxed at higher rates than those at earlier stages, like raw materials. Rates also differed on the basis of perceived income elasticities with necessities taxed at lower rates than luxury goods. In 1985-86 the government presented its Long-Term Fiscal Policy stressing on the need to reduce tariffs, have fewer rates and eventually remove quantitative limits on imports. Some reforms were attempted but due to revenue raising considerations the tariffs in terms of the weighted average rate increased from 38 percent in 1980-81 to 87 percent in 1989-90. By 1990-91 the tariff structure had a range of 0 to 400 percent with over 10 percent of imports subjected to tariffs of 120 percent or more. Further complications arose from exemptions granted outside the budgetary process.In 1970-71, direct taxes contributed to around 16 percent of the central government’s revenues, indirect taxes about 58 percent and the remaining 26 percent came from nontax revenues. By 1990-91, the share of indirect taxes had increased to 65 percent, direct taxes shrank to 13 percent and non-tax revenues were at 22 percent. COMPOSITION OF CENTRAL GOVERNMENT REVENUES (1970-71): SOURCE: , http://dbie.rbi.org.in (Reserve Bank of India, 2011) COMPOSTION OF CENTRAL GOVERNMENT REVENUES(1990-91): SOURCE: , http://dbie.rbi.org.in (Reserve Bank of India, 2011) India’s expenditure norms remained conservative till the 1980s. From 1973-74 to 1978-79 the central government continuously ran revenue surpluses. Its gross fiscal deficit also showed a slow growth with certain episodes of downward movements.The state governments also ran revenue surpluses from 1974-75 to 1986-87, barring only 1984-85. Thereafter, limited reforms in specific areas including trade liberalisation, export promotion and investment in modern technologies were accompanied by increased expenditures financed by domestic and foreign borrowing (Singh and Srinivasan, 2004). The central revenue deficit climbed from 1.4 percent of GDP in 1980-81 to 2.44 percent of GDP by 1989-90. Across the same period the centre‟s gross fiscal deficit (GFD) climbed from 5.71 percent to 7.31 percent of GDP. Though the external liabilities of the centre fell from 7.16 percent of GDP in 1982-83 to 5.53 percent of GDP by 1990-91, in absolute terms the liabilities were large. Across the same period the total liabilities of the centre and the states increased from 51.43 percent of GDP to 64.75 percent of GDP. This came at the cost of social and capital expenditures. The interest component of aggregate central and state government disbursements reflects this quite clearly. The capital disbursements decreased from around 30 percent in 1980-81 to about 20 percent by 1990-91. In contrast, the interest component increased from around 8 percent to about 15 percent across the same period.Within revenue expenditures, in 1970-71, defence expenditures had the highest share of 34 percent; interest component was 19 percent while subsidies were only 3 percent. However, by 1990-91, the largest component was the interest share of 29 percent with subsidies constituting 17 percent and defence only 15 percent. Therefore, besides the burden of servicing the public debt, the subsidy burden was also quite great. While India‟s external debt and expenditure patterns were heading for unsustainable levels, the proximate causes of the balance of payments crisis came from certain unforeseen external and domestic political events. The First Gulf War caused a spike in oil prices leading to a sharp increase in the government‟s fuel subsidy burden. Furthermore, the assassination of former Prime Minister Rajiv Gandhi increased political uncertainties leading to the withdrawal of some foreign funds. The subsequent economic reforms changed the Indian economy forever. LIBERALIZATION ,GROWTH ,INCLUSION AND FISCAL CONSOLIDATION (1991-2008): Following the balance of payments crisis of 1991, the government commenced on a path of economic liberalisation whereby the economy was opened up to foreign investment and trade, the private sector was encouraged and the system of quotas and licences was dismantled. Fiscal policy was re-oriented to cohere with these changes. The Tax Reforms Committee provided a blue print for reforming both direct and indirect taxes. Its main strategy was to reduce the proportion of trade taxes in total tax revenue, increase the share of domestic consumption taxes by converting the excise into a VAT and enhance the contribution of direct taxes to total revenue. It recommended reducing the rates of all major taxes, minimizing exemptions and deductions, simplifying laws and procedures, improving tax administration and increasing computerisation and information system modernisation. As a part of the subsequent direct tax reforms, the personal income tax brackets were reduced to three with rates of 20, 30 and 40 percent in 1992-93. Financial assets were removed from the imposition of wealth tax and the maximum rate of wealth tax was reduced to 1 percent. Personal income tax rates were reduced again to 10, 20, and 30 percent in 1997-98. The rates have largely remained the same since with the exemption limit being increased and slab structure raised from time to time. A subsequent 2 percent surcharge to fund education was later made applicable to all taxes. The basic corporate tax rate was reduced to 50 percent and the rates for different closely held companies made uniform at 55 percent. In 1993-94, the distinction between the closely held and the widely held companies was removed and the uniform tax rate was brought down to 40 percent. The rate was further reduced to 35 percent with a 10 percent tax on distributed dividends in 1997-98 (Rao and Rao, 2006). Despite these reforms, the tax system continued to have preferential exemptions and deductions as tax incentives for various socio-economic goals including location of industries in backward areas, export promotion and technology development. This led to the phenomenon of „zero-tax companies‟ whereby imaginative arrangements were use to leverage all these tax incentives with an intent to minimise tax liabilities. To counter this trend,the Minimum Alternative Tax (MAT) was introduced in 1996-97. It required a company to pay a minimum of 30 percent of book profits as tax. Further attempts to expand the tax base and increase revenues were the introduction of the securities transaction tax (STT) in 2004 and the fringe benefit tax (FBT) in the budget of 2005-06 In indirect taxes, the MODVAT credit system for excise was expanded to cover most commodities and provide a comprehensive credit system by 1996-97. The eleven rates were merged into three with a few luxury items subject to additional non-rebatable tax in 1999-2000. In 2000-01, the three rates were merged in to a single rate and renamed as central VAT (CENVAT). There remained three additional excises of 8, 16 and 24 percent. In case of custom duties, in 1991-92 all duties on non-agriculture goods that were above 150 percent were brought down to this rate. The „peak rate‟ was brought down to 40 percent in 1997-98, 30 percent in 2002-03, 25 percent in 2003-04, and 15 percent in 2005-06. The number of major duty rates was also brought down from 22 in 1990-91 to 4 in 2003-04. These four rates covered almost 90 percent of customs collected from items. This period also saw the introduction of the service tax in 1994-95, which was subsequently expanded to cover more and more services. Given that the Indian economy was having an increasingly large service component this increasingly became a major source of revenue. Eventually, provisions were made for allowing input tax credits for both goods and services at the central indirect tax level. Despite the reforms in central taxes, even after the economic reforms of 1991, state government tax reforms were inadequate and sporadic. A major move in this direction was the coordinated simplification of the state sales tax system in 1999. This eventually led to the introduction of a VAT in 21 states in 2005. The value added tax gives credit to taxes paid on inputs and provides relief from cascading. Implemented at the retail level this replaced the cascading sales tax providing great relief to consumers and traders alike while enhancing the revenues of the state government. The administrative design of the VAT ensures reporting of inputs and outputs resulting in substantial reduction in tax evasion. The basic features of the tax include two rates of 4 percent for common consumption commodities and inputs and 12.5 percent for the others. Some essential items are exempted and precious metals are taxed at 1 percent. The credit system covers inputs and purchases as also capital goods for manufacturers as well as dealers. Credit for capital goods taxes can be availed over three years of sales. The tax credit operates fully only for intra-state sales (Rao and Rao, 2006). This is a major hindrance to the formation of a smooth nationwide market and is to be addressed by the proposed Goods and Services Tax (GST). In consonance with the tax reform plans, the sources of central government revenue shifted from indirect taxes towards direct taxes. In 1995-96, about 54 percent of revenues came from indirect taxes while around 20 percent were from direct taxes (Figure 8). In 2000-01, the share of indirect taxes had gone down dramatically to around 45 percent while the contribution from direct taxes had increased to about 26 percent (Figure 9). By 2005-06, indirect taxes accounted for approximately 43 percent while the direct taxes share was about 35 percent.

The Prevention Of The Stock Market Crash Economics Essay

The Prevention Of The Stock Market Crash Economics Essay The Great Depression was an economic slump in North America, Europe, and other industrialized areas of the world that began in 1929 and lasted until 1939. It was the longest and most severe depression the world had ever seen. What happened and how did the stock market crash occur? Could it have been avoided? Simply put, yes! There were numerous issues and oversights that were made during that time by all Americans. Obviously, it did not occur overnight. Where had the consumers, government, and/or businesses gone wrong? There is no doubt that we, as Americans, have become smarter in terms of our economic knowledge, but are we doomed to go through another Great Depression in the future? What have we done, or what can we do to avoid this from happening again? To understand the Great Depression we first must look back at the economy prior to that time. For most Americans the stock market crash of 1929 has become the symbol marking the beginning of the Great Depression. The economic boom of the 1920s was reflected in a stock market which rose from 60 in 1920 to its peak of 381 on September 3, 1929 (Tothero Crowley, 2008). After World War I, the soldiers returned home. They had money in their pockets and many new products to spend their money on. Prior to the war, many products on the market were considered a luxury, but with the onset of mass production, many of those items that were considered a luxury were now common. With the soldiers returning from the war, everyone having money in their pockets, and having products and services readily available, this put the world in a euphoric state, with the idea that everything was ideal. The Roaring Twenties, as they were referred to, was a time of great economic prosperity. This was mostly due t o the wide array of consumer goods that were available. New technologies, soaring business profits, and higher wages allowed more and more Americans to purchase a wide range of consumer goods. Prosperity also provided Americans with more leisure time (The Great Depression (1920-1940), 2009). Americans were purchasing more consumer products on credit such as automobiles. As the economy blossomed, suburbs were created, U.S. cities had drastically changed, radios began broadcasting news and music, and the aviation and motion picture industry had grown, as well. Times were good for the American people during the Roaring Twenties. The decade saw North America becoming the richest region on the earth, with industry aligned to mass production, and a society with a culture of consumerism (Roaring Twenties Economy of the 1920s, 2005). With so much growth in the economy at that time, the government did not feel that they were in jeopardy of a crash so they did not intervene. Since the war was over and all the men were home, there were goods and services being pumped into the economy and everyone had money to spend. People were borrowing and spending money without a care, and thought nothing could go wrong. By the time the government figured out there was a problem with the economy, it was already too late. Prior to the Great Depression, governments traditionally took little or no action in time of business downturn, relying instead on impersonal market forces to achieve the necessary economic correction. From one extreme to the other boom to bust. The magical prosperity vanished almost overnight as people lost confidence following the stock market crash (Nelson, ed., 2000). This could have possibly avoided the crash had the government had the foresight to be more strict with the financial institutions and their lending habits. Individuals should have been wiser with their spending. They should have saved money rather than buying things they did not nece ssarily need. During the early 1920s, federal spending grew three times larger than tax collections and when the government cut back spending to balance the budget, a severe recession was the result of those actions. The value of farmland fell 30-40 percent, and the middle class comprised about 15 to 20 percent of all Americans, while the richest one person owned 40 percent of the nations wealth. Between 1920 and 1929, individual worker productivity rose 43 percent and the number of people reporting half-million dollar incomes grew from 156 to 1,489 between this time period; a phenomenal rise compared to other decades, but still less than the one percent of all income-earners. In the early 1930s, more than half of all Americans were living below the minimum subsistence level and the annual per-capita income was $750; and $273 for farm people. Construction was down by $2 billion and then a recession began, approximately two months before the stock market crash. During this timeframe, production dec lined 20 percent, wholesale prices were at 7.5 percent and personal income was at 5 percent. Then, on October 24, the stock market crashed. Investors called October 29th Black Tuesday for the loss of $16 billion, which was a lot of money in those days. Also during this time, the gross domestic product (GDP) fell 9.4 percent from the year before and the unemployment rate rose from 3.2 to 8.7 percent. During this time there was absolute panic, no major legislations were passed addressing the depression, a second banking scare occurred in the spring, the GDP fell another 8.5 percent, and unemployment rose to 15.9 percent. The decline in the GDP, while dramatic, was not as spectacular as the explosion in the unemployment rate. Mainly because the unemployment rate represents what was not produced that could have been produced. Consumer purchasing somewhat fell, government purchases did not fall at all compared to 1929, but there was a dramatic collapse of investment purchases. Why did investment purchases collapse so dramatically? Because interest rates affect investments. The problem in the early 1930s was that the rate of inflation was negative, meaning there was deflation instead of inflation. This meant that borrowers were not paying back as much money as they borrowed. The table below shows the nominal interest rate was declining during this period, but because the rate of inflation was negative, the real interest rate was much higher than the nominal interest rate. YEAR PRICE INDEX RATE OF INFLATION % NOMINAL INTEREST RATE % REAL INTEREST RATE % 1929 13.12 5.85 1930 12.60 -3.96 3.59 7.87 1931 11.34 -10.00 2.64 14.04 1932 10.05 -11.38 2.73 15.92 1933 9.78 -2.96 1.73 4.54 In the years leading up to the stock market crash, the stock market had gained much popularity as a way of making money. Because stock prices had been on the rise, they gained the reputation of being a safe way to invest. Beginning in 1926 and ending with the crash in 1929, the market moved up nearly 400%. Many investors believed stocks were their ticket to riches (Valentine, 2009). Investors were talking up the idea of how much money could be made by investing in stock. With all the talk of the get rich quick scheme and the relaxed credit terms from banks, the buying frenzy began. Simply put, people were naive, greedy, and wanted a way to get rich quickly. American businesses and the people placed too much faith on what they did not fully understand, and they did not think of the long-term repercussions that could occur in the event of an economic crisis, such as a recession, or in this case, with the Great Depression. Problem one: People were too loose with their money. Rather than to save for their families, they placed their money in the stock market in hopes of receiving a nice return. People were purchasing stock on margin. What does this mean? They were only required to pay 10% down and borrow the other 90%. For example, if $10 worth of stock was purchased, the investor put in $1, while the mortgage broker put in the other $9. It was a good deal as long as stocks were gaining value. However, if the stock lost value, the stockbroker would issue a margin call requiring the investor to pay back the loan. In the example above, not only did the investor lose the $1 he invested, he also had to pay back the $9 hed borrowed (Valentine, 2009). As you can see from the example, stocks could go awry at any given time injuring the broker, but more specifically injuring the investor. People were disillusioned that stocks would always rise and never fall. Today, not all stocks and investors are eligible for a margin account. This is a great benefit in determining what stocks investors are safer using, such as a margin account, and may not be so prone to losing the funds that are invested. Do you recall the definition of a margin call? Money placed for the original purchase of a stock needed to be paid back by someone; the investor. The economy rapidly deteriorated as people sold their stocks to hold on to their hard earned money, and brokers wanted their borrowed money back. Resolution: In general, there is no resolution on how people should spent their money. We cannot tell another individual what they can or cannot buy. Some people save, while others do not. An option that is current in present times, but could have been an acceptable solution prior to the crash, could have been to have financial regulators increase their financial ratio requirements for banks so less money would have been borrowed. Banks would have had less of a money supply by doing as such. Perhaps by increasing the banks financial ratio requirements, Americans generally could have spent less and purchased less in stocks. The stock market crash devastated the American economy because not only had individual investors put their money into stocks, so did businesses. When the stock market crashed, businesses lost their money. Consumers lost their money too, because many banks had invested their money without their permission or knowledge (Valentine, 2009). Problem 2: There were no programs that would protect the consumers from having their money be used, without their permission, by banks to pay back debts for the stocks. As you can imagine, American consumers and businesses were losing money, which caused people to panic and pull their life savings from the banks to hold on to what they had left in order to feed their families. Resolution: Unfortunately, without the regulations in place, there were no regulatory rules on what could or could not be done by the banks. The financial institutions were stealing money from the American people without permission. Until the proper regulations were put into plac e, there was nothing that could have been done at that time. Resolution: Eventually, the Securities and Exchange Commission (SEC) was createdto regulate stocks, bonds, and other commissions. The Federal Deposit Insurance Corporation (FDIC) was also created to insure consumers deposits in FDIC-enrolled financial institutions. In addition, the Federal Crop Insurance Corporation (FCIC) was created to insure crops planted by farmers (Valentine, 2009). Soon after Herbert Hoover became president, the stock market began to take a turn for the worst. In 1929, some of the larger investors realized the stock prices were artificially high as a result of the mass investments from speculative investors. So, those savvy investors started trading their stocks and consequently, stock prices began to fall. Then, brokers issued margin calls leading to further stock market drops (Valentine, 2009). Problem three: The way the stock market was handling the tracking of the volume of buying and selling of stocks. As stocks were traded and falling in price, investors started selling their shares over the course of several days, being Black Thursday through Black Tuesday, which caused the stock market to crash because millions of shares were being sold too rapidly. The technology then was not what it is today. This should have been taken into consideration when dealing with something of this magnitude. At one point the ticker tapes were nearly 90 minutes behind the market causing the market to drop by 33 points or 9% by the end of the day. Also, by Tuesday, the ticker tapes fell nearly 3 hours behind causing another 12 % drop in the market. Due to the issues with tracking most of the time investors were trading blind (Stock Market Crash of 1929, 2007). Knowing what we know today, regulations should have been put into plac e to help keep things under control. For example, today if the DOW drops by 10% before 2 p.m., trading will be halted for one hour. If the DOW drops by 20% before 2 p.m., trading will be halted for two hours. If the DOW drops 30% before 2 p.m., trading will be halted for one day and if another event such as September 11, 2001 occurs, they will either close early or not open at all to prevent panic (Little, 2009). Besides the issues of tracking, another subject to address is the relaxed credit terms. When stock prices began to drop, the market started changing. In turn, investors were requiring the loans to be paid in full. If the individual had their money in the bank, there was a good chance the bank had invested their money without their permission causing yet another loss of funds on top of the money they had already lost themselves in the stock market. Although President Hoover believed that the government should not intervene with the economy, he said families could turn the economy around if they continued to work hard and rely on themselves (Valentine, 2009). Of course, we all know hindsight is 20/20, but by creating the SEC, FDIC, and FCIC I believe that it helps the economy have a little assurance that the government is trying to help anyway that they can to prevent the stock market from crashing again. In conclusion, it takes more than the government, investments, and American people to change economic activity. It takes everyone in the U.S. to contribute, in one way or another, to the overall health of the economy. In regards to government involvement, money supplies and/or government spending can be increased or decreased, and/or taxes can be lowered or raised in order to assist in the health of an economy. Businesses can invest in new equipment or buildings, and/or construct new homes. We, as consumers, should find a happy medium, if applicable, to our spending habits. For instance, do not borrow more than you can pay back or afford. On the same note, do not spend more of your income on unwanted items and only spend on what is absolutely needed, such as food, clothing, bills, and leisurely activities. Unlike many Americans prior to the stock market crash, do the needed research prior to blindly committing and purchasing any good or service that is not 100% understood. It is best to financially access your individual needs based on your income. Take into consideration the chances of a potential layoff or the future health of a loved when considering a major purchase of something. It is best to plan for the future and to invest in something that is thoroughly researched and understood prior to placing your life, and that of your family, at stake. With all the more economic knowledge we know today, can we avoid another Great Depression? Only time will tell if lessons have been learned, but knowledge is the first step in understanding how to avoid disasters such as those that had occurred 80 years ago.

Various Interpretations of the Progressive Era Essays -- Progressive M

â€Å"What was the Progressive Movement?†[1] Historian Peter G. Filene presents this question in his article, â€Å"An Obituary for ‘The Progressive Movement’†, in order to introduce the reality that for decades scholars struggled to propose an answer to this question. They have and still do struggle because there are many ways to consider this question and qualify the Progressive Era: such as its definition, time frame, significant turning points and important people, goals, successes, and failures. Given these ways of explaining the Progressive Era expressing its ideas appears to be a daunting task. However, the first historian to successfully define and explain the Progressive Movement was historian Richard Hofstadter. With his 1954 book Pulitzer Prize winning book, The Age of Reform, Hofstadter links the major reform movements before and after the turn of the twentieth century. Instead of citing specific reforms or leaders, Hofstadter deals with the ideas connecting Populism, Progressivism and the New Deal, while examining the differences and similarities between them. Other historians subsequently conduct their own research and formulate their own opinions in response to Hofstadter’s book. Peter G. Filene writes in 1970, â€Å"An Obituary for ‘The Progressive Movement’†, which proposes the Progressive Movement cannot be considered a movement at all because of its disunity and lack of identity. Richard L. McCormick writes â€Å"The Discovery that Business Corrupts Politics: A Reappraisal of the Origins of Progressivism† in 1980 to offer the corruption of business was the driving force behind Progressivism. Finally, Paula Baker argues in the Progressive era government adopted the domestication role and social policies previously hel... ... [26] Paula Baker, 640. [27] Ibid. [28] Paula Baker, 641-642. Works Cited Peter G. Filene, â€Å"An Obituary for the Progressive Movement,† American Quarterly 22 Spring 1970. Web. 2 June 2015. http://bhsecprogressivism2.omeka.net/items/show/267 Richard Hofstadter, The Age of Reform (New York: Vintage Books, A Division of Random House, 1955. Web. 1 June 2015. http://www2.fiu.edu/~lichtens/syllabi/brinkley.pdf Richard L. McCormick. â€Å"The Discovery that Business Corrupts Politics: A Reappraisal of the Origins of Progressivism,† American Historical Review, 86. April 1981. Web. 4 June 2015. http://www.nyu.edu/classes/gmoran/MCCORMICK.pdf Paula Baker, â€Å"The Domestication of Politics: Women and American Political Society, 1780-1920,† American Historical Review, 89 (June 1984). Web. 26 May 2015. https://bhsecamericas2.omeka.net/items/show/15

Poe - A perfect Plan of Guilt :: essays research papers

Revenge is sweet and guilt it torture. Montresor decides to dabble between revenge and guilt and ultimately learns that revenge has consumed him. This can be seen when Montresor is aware of the suffering that Fortunato is feeling as he begins killing him. The compassion that Montresor feels is coupled with guilt from the murder he committed. These feelings make Montresor’s perfect plan of revenge lead to a lifetime of guilt. Revenge has a thin line which can easily be crossed when the revenge no longer fits the crime. Montresor speaks of this during the first paragraph when he states â€Å"I must not only punish, but punish with impunity† (Poe 141). He wants to be exempt from harm as well as from guilt. This would make the revenge sweet, or satisfying. Montresor comments on a satisfying revenge at the end of the first paragraph by saying â€Å"A wrong is unredressed when retribution overtakes its redresser. It is equally unredressed when the avenger fails to make himself felt as such to him who has done the wrong" (141). Montresor means that revenge must be satisfying, but can not consume himself. He can not step over this line and commit a crime himself. This act will cause guilt upon the avenger and eliminate any satisfying feeling that he might have received from the revenge. Montresor begins to be overtaken by his retribution almost immediately. His fascination with deception is his weak point. Montresor plans a revenge that would satisfy him for the insults that have been committed against him. While doing so he wants to be stealthy and states â€Å"it must be understood that neither by word nor deed had I given Fortunato cause to doubt my good will† (141) He continues to deceive Fortunato by lying to him about the pipe of Amontillado and playing on his nature of a wine connoisseurship. Montresor would say â€Å"I have my doubts† (142) knowing that Fortunato would only become more motivated to taste the Amontillado and tell of its authenticity. It is this deception that he becomes carried away with. This becomes a game for Montresor. He uses Fortunato as a pawn, and plays each move very carefully. While Montresor has become fatally involved in his plan of revenge he still has not forgotten that Fortunato is a friend. When they are ready to go to the vaults, Montresor shows concern for Fortunato’s health.

Why Wealth and Status Dont Play a Key Role in Jane and Mr. Rochesters Relationship :: Jane Eyre Wealth Social Status Essays

Why Wealth and Status Don't Play a Key Role in Jane and Mr. Rochester's Relationship "My bride is here because my equal is here, and my likeness. Jane, will you marry me?" When one talks about marriage in the Victorian society, wealth and status is first considered. Love comes last or, more often, it is never considered. In the novel Jane Eyre, the relationship between Mr. Rochester and Jane is quite different. This is clearly shown when Blanche Ingram changes her mind about marrying Mr. Rochester, preparations for Jane's abortive first marriage, their attraction for each other without the presence of money, and when Jane inherits money and she makes a surprising move. The importance of wealth and status in Victorian marriage is immense. In Victorian England parents made their girls marry men from similar wealth and position. If a woman did marry purely for love and not for wealth she risked a life of poverty, homelessness, and hunger. This factor can also be seen in Jane Eyre, because Jane's mother was married to a poor clergyman against the will of her father. She married purely for love and therefore risked a life of being poor. This was almost a punishment for Jane's mother as she married against her father's will and only married for love. Wealth and status is also important in the novel Jane Eyre, although they are important in different aspects of the novel and important to different people. There are two opposing views. Blanche Ingram, a very spiteful character is going to marry Mr. Rochester because of his wealth but when she is called to the gypsy to find out her future, she "finds out" that he is not as rich as he seems and therefore cancels all plans to marry him. "She (Blanche) considers the Rochester estate eligible to the last degree; though I told her something on that point about an hour ago which made her look wondrous grave".1 However there is another view to the importance of wealth and status. Jane Eyre, the main character says, "Were I a gentleman like him, I would take to my bosom only such a wife as I could love".2 Money and status are not important to her. In her opinion marriage should not be an act of convenience. During the preparations for Jane's abortive first marriage, Mr. Rochester wants to buy Jane expensive items e.g. clothes and jewels. Jane has no intention of buying expensive jewels and clothes, as they are not important to her. She says, "Oh, sir! - never mind jewels! I don't like to hear them spoken of. Jewels for Jane Eyre sound

Authentic Freedom Essay

A human being is free to do as what they please! That’s just an interpretation of authentic freedom. All too often humans think of freedom as a free for all. Authentic freedom is does not mean doing what one wants when one wants to whom one wants, but rather it means, understanding who one is , that a human being is not alone and here to contribute to society. Authentic freedom is a paradox, one that will make you think, but not a contradiction. The more freedom a human being has, the more one is called to respond. â€Å"Freedom is exercised in relationships between human beings. Every human person, created in the image of God, has the natural right to be recognized as a free and responsible being. All owe to each other this duty of respect. The right to the exercise of freedom, especially in moral and religious matters, is an inalienable requirement of the dignity of the human person. This right must be recognized and protected by civil authority within the limits of the common good and public order (Catechism, 1732). A human being gains freedom, by exercising freewill in a positive and productive way. People make choices in daily life, choices that affect the ability to live a free life. When one chooses to go counter to the common good, a human being chooses slavery, slavery to the consequences of one’s choice. †The more one does what is good, the freer one becomes. There is no true freedom except in the service of what is good and just. The choice to disobey and do evil is an abuse of freedom and leads to â€Å"the slavery of sin† (Catechism, 1733). When a human chooses not to listen to their conscience one chooses to listen to the voice of evil, when that happens, a human being has just entered in to a slave/master relationship. With them being the slave. Freedom allows one to make choices that benefit themselves and more importantly the world around them. Freedom demands of one, or rather obligates one to concern ourselves with the affairs of the world around us. If you look at the world around a human being, countries where freedom is lacking, the overall population is less concerned with their fellow man, then in a freer society. The same can be said of individuals, the more freedom a human being has, and the more responsible one acts to other, on the whole.

How Sarbannes-Oxley Act affects internal controls

Sarbanes-Oxley Act which is also referred to as the public company accounting reform and investor protection act is a wider legislation passed in 2002. The SOX act has provisions touching on the standards for all the United States public firms’ boards, management as well as the public accounting companies. Sarbanes-Oxley Act has been considered one of most important legislation to the America’s security laws probably since the New Deal of passed in 1930s. According to Moeller (2008) it has eleven sections that clearly spell out the standards it oversees. The provisions of this law implies that American companies as well as those with the united states listings have a legal obligation to show that they have efficient and effective mechanisms of both internal control and financial reporting. The main objective of the Act is to enhance both transparency and financial reporting disclosures that would stifle any form of corporate or financial fraud. The SOX also enforces the responsibility of the senior officers in ensuring accuracy as well as honesty in the disclosure of financial outcomes (Porter & Norton, 2007). The Sarbanes-Oxley act of 2002, in sections 302 and 404 have some tough provisions regarding the internal controls. Section 302 for example calls for certification of all information relayed to the public or market as correct. This section also requires evaluation of the â€Å"disclosure controls† (that is having full control of all information issued to the public) as well as being aware of any changes that would or might affect the performance of the controls from the time evaluation was done. It requires that every company set up certain internal procedures that would ensure honesty and accuracy in financial reporting (Kairab 2004). Section 404 on the other hand a requirement for annual evaluation of controls effectiveness and procedures for financial reporting. It further stipulates that this evaluation must be vindicated by an external auditor’s report. Moeller (2008) suggests that the external auditors are obligated to give opinion regarding the effective internal controls over financial disclosure was adhered to in every material respects by the management. In addition to this, the external auditors are further mandated to offer an opinion on the financial statements accuracies (Ramos, 2006). Section 404 of the Sarbanes Oxley act requires both the management and the external auditor to disclose on the adequacy of the firm’s internal control over financial disclosures. It has been considered quite costly to implement because documenting as well as testing some of the vital financial manual and other related automated controls would need a lot of effort (Moeller 2008). Benefits so Far In a research carried out in 2006 among almost 2,500 American companies, it was found out that those firms that had no material limitation in their internal controls and those that corrected any of such limitations in appropriate and timely manner, registered a greater outcome in share prices as oppose to firms that did not. The report further showed that the profits to a compliant firm in share price were much higher than the companies’ respective costs for Sarbanes-Oxley Act section 404 (Ramos, 2006). Conclusion Despite many attempts by PCAOB to help reduce the high cost of compliance, practice as well as guidance, much is needed to be done to improve on the management of companies vis-a-vis adherence to the Sarbanes-Oxley act. Nevertheless it is one great piece of legislation that will help to safeguard some of the America’s companies fundamental imperative in their markets which are characterizes by high level of corporate confidence as well as participation which has long been second to none.