Economy of the United States - Essay Example

The U.S. Economy The U.S. economy has yet to return to its optimal performance that was experienced in the 90’s. Starting in 2001 the United States has been experiencing downward trends in the economy which can be attributed to inaccurately speculated mortgage derivatives coupled with soaring rates of unemployment. While the US attempted to correct some of the causes through increased government intervention, strict laissez-fare economist believe that the economy could correct itself to find a new equilibrium. In 2008, the country suffered yet another stock market crisis which caused consumers to spend less which directly affected the gross domestic product. Two years later, the economy is improving but remains volatile (Anderson, 2008). This paper identifies self correcting mechanism within the economy that could help stabilize the economy. Moreover, this paper describes fiscal policy that can be used by the government to help mitigate the impact of the recession. The middle class continues to shrink as the gap between the rich and the poor continues to widen. These are all signs of a recessive gap in the economy (Anderson, 2008). Although the U.S. economy has bounced back, it has yet to reach equilibrium and still runs on a large budget deficit. This paper will analyze key market indicators before identifying if the response by the American Government and the Federal Reserve was sufficient. The first key indicator of the economy is the consumer price index. The CPI is a measure in the changes of price levels of consumer goods and services purchased per capita (Zeleny, 2011). The CPI measure the prices of the market basket of goods that are most sold and utilized by consumers. The graph below is an illustration of the 2011 Consumer Price index from the Bureau of Labor Statistics. On average, this graph indicates that prices rose across the board. This could be an indicator of increasing interest rates. When the dollar is devalued, businesses tend to increase their prices. This graph specifically focuses on the major foods and beverages which are a part of the primary market basket items. While prices have risen for the most part, the efforts taken by the government and the Federal Reserve have softened the impact of the recession (Anderson, 2008). In terms of the economy, Adam Smith proposed the theory of the “invisible hand in his work entitled “The Wealth of Nations”. In this book, Smith proposed that a capitalist economy is guided by an invisible hand that self corrects for both inflationary and recessionary gaps (Hodgson, 2007). Specifically, a recessionary gap indicates that all available resources are not being utilized. That is to say that the economy is operating below its most optimal level and is consequentially inefficient. In order to correct for this, the short-term aggregate supply curve must move to the right gradually towards equilibrium because of the underutilization of labor. This means that unemployment rates are higher than the actual percentage. The consequence of this is that the cost of labor is driven down, which increases access to employment. If the government deems it necessary to intervene in the economy then they are likely to utilize fiscal policy to correct recessionary gaps. Fiscal policy is primarily accessed through the use of taxation and government spending. The government can increase the amount of disposable income for individuals by decreasing taxes. This in turn increases consumer spending which is a factor in calculating the GDP. If consumers are able to consume more, that means that producers are able to sell more goods which could in turn lead to the creation of more jobs. Another action the government can take is the increase of transfer payments. Individuals receiving transfer payments will have more disposable income which means they will consume more goods (Hodgson, 2007). Business confidence is another factor indicating that the economy is showing signs of survival. A program that was recently implement was Cash for clunkers. The program was designed with the purpose of increasing consumer confidence and auto industry confidence. Additionally, New programs endorsed by Obama and Geithner are creating the perception that the executive branch is taking control of the economic crisis which naturally causes increases in consumer, business, and investor confidence (Wakker, 2008). Furthermore, The U.S. unemployment rate fell in July of 2010 for the first time in 15 months as employers cut far fewer jobs than expected, giving the clearest indication yet that the economy was turning around from a deep recession (Wakker, 2008). Next, Education and health services continued to add jobs, with payrolls increasing 17,000 in July of 2010 after rising 37,000 in June . Government employment increased 7,000 after slipping 48,000 in June. Leisure and hospitality added 9,000 jobs. In terms of the stock markets, the Dow Jones industrial average is trading at its highest level since November 08, while the Standard & Poor's 500-stock index has climbed to its highest level since October 08 (Henry, 2009). Businesses such as Freddie mac have began claiming turn arounds of up to 15 billion between first and second quarter and are no longer seeking government assistance, indicating that stability is finally taking effect at the top trickling down to the lower levels. This is critical to gain access to liquidity and credit for lenders and consumers (Sutter, 2007). Additionally, in the first quarter of 2010, gross domestic product shrank at a rate of 6.4 percent. In the second quarter, the economy shrank only 1 percent. A survey of U.S. small-business owners reveals growing confidence in the economy and expectations of an economic turnaround in 2010 (Bajaj, 2009). Top economists have been quoted several times stating that small businesses are the cornerstone of economic recovery. Finally, Congress recently reinstated the Pay as you go rule mandating that all new funding be specified in a plan as a trade-off or new tax (Groenewegen, 2008). This is in order to control the spiraling deficit. All of these facts point to the conclusion that business confidence is increasing as we move further away from recession. The unemployment rate has hit its lowest level since May of 2009. Because the unemployment rate is merely an indicator of the individuals who are unemployed and want back into the job force, the statistic fails to account for discouraged workers (Zeleny, 2011). This means that the rate may still be high and misreported (Kennedy, 2003). Employment in December rose by approximately 100,000 jobs, according to the US Department of Labor. Additionally, the unemployment rate fell from 9.8 percent to 9.4 percent which is a partial reflection of fewer people actively looking for work (Zeleny, 2011). The modest increase in employment underscores the task of replacing jobs once they are lost. From the inception of the recession in late 2007 to its end in June of 2009, the economy reportedly lost between 6 and 8 million jobs (Zeleny, 2011). Then in 2010, according to the Bureau of Labor Statistics, the economy gained 700,000 jobs back after not adding any jobs in 2009 (Zeleny, 2011). Austan Goolsbee, chairman of the Council of Economic Advisers said, “The overall trend of economic data over the past several months has been encouraging, due in large part to the initiatives passed by this Administration, but we still have a ways to go.” This graph indicates the unemployment disparity between the states. Specifically, because of the loss of jobs from the car industry, Michigan is facing the highest levels of unemployment comparatively. Moreover, states with an agriculturally based economy have the lowest rates of unemployment, which is seen in the bread basket. This could suggest tariffs as a solution to policy makers (Evans-Pritchard, 2010). While international free trade agreements are key to a globalized world, the protection of local economies occurs when companies have an incentive to localize the production (Zeleny, 2011). In a discussion over the economy, President Obama said, “We know these numbers can bounce around month to month, but the trend is clear: We saw 12 straight months of private-sector job growth. That's the first time that's been true since 2006.” An economist at the Parthenon Group, Richard DeKaser stated that “The federal response to the economy is done. It’s over, the stimulus legislation that passed a month ago in the lame-duck Congress is all we are going to get.” Though the government may not be able to help alleviate the distressed caused by the markets, the economy is still showing signs of progress. The economy is experiencing lower rates of job loss which means that employment is becoming increasingly stable (NY Times, 2010). But job growth is not consistent with expectations which could potentially result in efforts by the FED to enter into a third round of monetary easing (NY Times, 2010). In the meantime, the Federal Reserve needs to keep the mortgage rates down in order to keep the economy from slipping into another recession (Zeleny, 2011). In fact, according to ADP, private employment rose 297,000 after a 92,000 rise in November of 2010 (Zeleny, 2011). This graph indicates that the unemployment rate rose substantially in 2008 which is indicative of the economy losing stability (Kennedy, 2003). This suggest that economic growth is slowing. The following graph is indicative of economic growth trends within the U.S. This graph indicates that the fourth quarter of 2008 showed a negative 4 percent changed in real GDP. The difference between real GDP and GDP is that real indicates that the numbers have been adjusted for inflation (Friedman, 1953). In dealing with the slow economic growth, the government extended the Bush tax cuts in order to decrease the expenses that business has to pay assuming that they will take the money they save and reinvest it in the job market. This indicates that the government is operating under a Keynsian economic module (Zeleny, 2011). The drop in US GDP has been caused by a reduction in manufacturing output which can be caused by the lapsed car market as described earlier in the analysis about Michigan. Another factor causing the drop in economic growth is the declining consumer spending. Consumer have less disposable income which means that they have less money to spend with businesses. This is especially true when viewing the recent increase in prices for crude oil (Wearden, 2008). Businesses are increasing prices because the cost of production has risen, as well consumers are decreasing spending because of the increase in the opportunity cost for capital accumulation. As housing prices continue to decline in the U.S. the value of assets held by individuals and banks continue to sink. Beyond the housing market, businesses are not investing as much as previous numbers which is another indicator of slowed economic growth. Finally, the decline in exports coupled with the relative decline in the value of the dollar due to inflationary tactics used by the fed, have resulted in decreased economic growth (Blaug, 2007). The US Department of Commerce is expected to release its trade balance report for the month of February. Most economists anticipate that the trade gap has shrunk to $44 billion from $46.2 billion in January. The above graph indicates the disparity between imports and exports. In conclusion, the complex economic problems in the status quo have been exacerbated by multiple attempts by the government to intervene. Perhaps it would be more beneficial to let the economy correct itself. A key external reason that warrants this is the fact that our economy itself is in a transition phase. With more jobs are being outsourced to countries with a comparative advantage, the future of the job market in the US is uncertain. Despite the high levels of unemployment, the have continued to fall from 2008 levels. This shows signs that the economy is attempting to correct itself. Therefore it would be more beneficial to value economic independence over government intervention. Appendix Figure 1. http://www.bls.gov/news.release/cpi.t01.htm Figure 2: http://www.prosebeforehos.com/progressive-economics/10/22/unemployment-rates-by-state-in-the-u-s/ Figure 3: http://www.google.com/images?um=1&hl=en&safe=off&rlz=1G1GGLQ_ENUS297&biw=1191&bih=620&tbm=isch&sa=1&q=trade+balance+2010&aq=f&aqi=&aql=&oq= Figure 4: http://upload.wikimedia.org/wikipedia/commons/1/10/United_States_Mean_Duration_of_Unemployment.jpg Figure 5: http://calculatedriskimages.blogspot.com/2010/08/trade-balance-june-2010.html Work Cited Anderson, James E. (2008). "international trade theory", The New Palgrave Dictionary of Economics, 2nd Edition.Abstract. Bajaj, Vikas (2009). "Has the Economy Hit Bottom Yet?". New York Times. Retrieved 2011-04-11. Blaug, Mark (2007). "The Social Sciences: Economics". The New Encyclop?dia Britannica. 27, p. 347. Chicago. Evans-Pritchard, Ambrose (2010-09-13). "IMF fears 'social explosion' from world jobs crisis". The Daily Telegraph (London). 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