Success of the US Government and the Federal Reserve: An Evaluation - Coursework Example

Success of the US Government and the Federal Reserve: An Evaluation Whenever we are going to judge the ability of the government of any country we have to judge it through many aspects and perspectives. Among them economic perspective is most significant one having mammoth importance. The fact is that the government of the country is responsible for driving out the tempo of economic development. Higher the level of economic development higher will be the political power of the economy over the globe. Now the question arises regarding the vastness of the concept economic development. It is not possible for anybody to judge everything individually especially in a situation in which many of them are interrelated. For the sake of simplification we consider the following four perspectives: a. Price stabilization or inflation control b. Maintaining a steady Balance of Payments c. Securing high level of employment d. Economic growth. Price stabilization is possible through controlling inflation and cushioning the economy from shocks. A stable price rate maintains a low cost of living as well as the competitiveness of the domestic exportable in the global market. After the recession of 2001, US economy recovered from it and showed a good pace. The post reform period faced a healthy growth rate. There was an efficiency gain through enhanced global competition. The problem started with further oil price shock at 2005. But despite the oil price shock the inflation rate remained controlled at 2005. But over time we could find a growing inflation rate in the American economy. This may be said to be attributable to the budget deficit of the government. The government continued to mount up the budget deficits instead of a surplus. In the fiscal year 2007, the budget deficit of the Bush administration accounted for $354 billion. So we can say that the budget management of the government was poor at that time and that was a major cause of the problem of inflation. The oil price shock also worsened the situation and the American economy started to face chronic inflation causing a decline in the purchasing power of the US $. (McKeeveR Institute) The matter that fueled up the inflation in the United States is the minimum wage law by the government. In 1990s the minimum wage rate was set to $ 3.80 which has become $ 7.25 now (almost doubled). Higher wage rate always ensures higher cost of production and hence higher level of inflation. (Infoplease) The strong US army and growing expenditure on it is another cause of US inflation. The peace keeping process initiated by President George W Bush has caused a hike in the public expenditure. A total amount of $ 407.1 has been allotted for the budget of the United States Department of Defense’s expenditure. This is also responsible for the surging rate of inflation in the US economy. (Department of Defense) Inflation prospects are significant, not just because of the fact that price stabilization is in itself desirable and part of the Federal Reserve’s mandate from the Congress, it is also true that price stability is necessary to ensure rapid and sustained growth of output and employment. Stable prices generate long-term economic growth by allowing households and firms to take economic decisions and undertake productive activities with less concern about major or unanticipated changes in the price level and their immediate financial aftermaths. Experience reveals that low and stable inflation and inflation expectations are also coupled with greater short-term stability in output and employment, perhaps partially because they provide the central bank greater latitude to fight against transitory distortions to the economy. To solve the problem of the mounting inflation in the US economy, the government realized the necessity to control the inflation. That’s why, in 2008, the new law the name of which is ‘Price Stability Act of 2008’. This act concentrated on ensuring price stability. The main objective was to promote a stabilized and long term purchasing power of the US $. The price stability act declares  “It is US policy that the principal economic responsibilities of the Government are to establish both long-term economic growth and increases in living standards, maintain free markets, low taxes, respect for private property, and the stable, long-term purchasing power of US currency”. (Open Congress, Price Stability Act of 2008) This act clarifies that the Board of Governor of the United States Federal Reserve System should focus on the promotion of price stability through inflation control should be the primary as well as the long term objective. The main step of the act was the amendment towards 1. Establishment a numerical definition of the particular term of price stability 2. Maintenance of a monetary policy in order to promote long-run price stability - That implies that the board would consult with and report to the Congress semi annually. Thereby the committee objectives and the plans could be framed to achieve and maintain a stable price level over time. (Open Congress, Price Stability Act of 2008) The United States has not been able to ensure a lower price. To some extent, it is due to the problem of continuous war expenditure in Iraq and to some extent it is attributable to the OPEC nations and Venezuela also. The global recession has brought the problem of US at a broader daylight by the existence of a stagflation. Now we consider the recent employment policy of the United States. Actually US is a country which has always been a lucrative destination for the jobseekers. The migrants from different countries have been gathered in this country for a better standard of living and better payments. The migration of the workforce from every corner of the globe has endangered the workers of the United States. There is another problem which is termed as outsourcing. Outsourcing is a major threat to the US workers. In 2006 President George W Bush encouraged deregulation and introduced tax cut for the private entrepreneurs. It was assumed that the process of deregulation along with tax cut would enable the domestic entrepreneurs to employ more US workers. But the matter of fact is that the corporate sector was lured to get the benefit of cheap labor along with lower tax rate. Treasury secretary Jon Snow and the chairman of the Council of Economic Advisers, Gregory Mankiw supported the phenomenon of outsourcing publicly. Their ground was that outsourcing would enhance the efficiency and competitiveness of the firms. On the other hand President Bush argued that the real driving forces for outsourcing were ‘frivolous’ lawsuits, over regulation and over taxation on the private entrepreneurs. He argued that the agreement of NAFTA would be more beneficial for workers due to heavy export drive and more trade deregulations would ensure higher room for employment of US workers in their domestic export sectors. (Problems with Current US Policy) The matter of fact is that though liberalization and deregulation encourages the private entrepreneurs to expand economic activities in the American economy, the outsourcing can’t be stopped by these measures. The main cause of outsourcing is the availability of cheap labour which enables the producers to use a most cost effective measure of production. Unless the migration is stopped the problem of outsourcing would continue and the US workers would face the problem of unemployment. The recent recession has worsened the situation. Due to the recession, monetary shortage and liquidity crisis has pulled down the aggregate demand enough and for the informal sector the migrant workers are the major competitor of the US native unskilled work force. The Balance of Payments is a systematic record of all the transactions of the residents of the country with the rest of the world. It includes current account. It is a major determinant of the stock of international reserve in the hand of the central bank and the exchange rate also. It is an indicator of the economic performance of the country. From the beginning of 21st century the United States has been facing the problem of severe Balance of Payments deficit mainly due to huge flow of import from China and other developing economies. The recent recession has worsened the situation. The inflation in United States has also been a cause of the severe deficit. Normally while a country faces the crisis in the Balance of Payments or a chronic deficit in the Balance of Payments account, it has a number of policy prescriptions in the hand but the question is what the appropriate policy would be. One can easily think of a deflationary policy i.e. the policy that would choke off the import. To choke off the import of a country needs either the policies of trade restrictions instead of adopting the policy of trade liberalization but the matter of fact is that such a policy can’t be adopted by the United States as it is a member of World Trade Organization which is such an organization that pleads for trade and investment liberalization. On the other hand, if the free trade policy is adopted the government has to adopt a strategy through which the domestic consumers are compelled to cut down their import expenditure. It can be easily done by adopting the deflationary policies which would choke of the level of production as well as national income and hence consumption. A tight monetary and fiscal policy mix can help the economy to achieve the target. The main problem of adopting such a policy is that it would further generate severe problem of unemployment and hunger in the country. In such a dilemma the best policy is the expenditure switching in favour of domestic products. In other words we can say that export promotion coupled with import substitution could be a better policy to recover from the Balance of Trade deficit. President Obama has introduced a new trade agenda addressing the new challenge of global competition. Obama’s trade agenda has targeted the entrepreneurship and market competition. The agenda also includes the objectives of securing the interest of American workers along with enhancing the competitiveness of US products. The elimination of the barriers of trade at the face of serious recession has been a challenge for the US economy. The Economy Recovery Act has been introduced to improve the trade adjustment assistance programmes. The President has targeted to access the new markets in the different corners of the globe irrespective of the market size. The new trade negotiations have been planned for the improvement in the Balance of Payments situation in the economy. In 2008, the US trade of goods and services (including both export and import) accounted for 30.8 percent of the Gross Domestic Product of USA. The total export earning of USA has accounted for 13.1 percent of the US economy. Such an expansion of trade has contributed to job creation and enhancing the purchasing power in the hand of the people. That would definitely contribute to encourage aggregate demand. In thumbnail the trade policies of Obama can be listed as: 1. Support a rule based trading system which would ensure the well being of the citizens of US trading partners 2. The trade policy should be socially accountable and politically transparent. 3. Trade policy should be used as a tool to achieve progress on national energy and environmental goals. 4. Trade policies should solve the unresolved trade frictions. 5. The resolution of pending trade agreements and investment treaties should be done for the sake of the nation in a transparent manner. (2009 Trade Policy Agenda and 2008 Annual Report) Economic growth is a major objective for the economic development and we can say that for economic development economic growth is the necessary condition. The US economy is one of the major economies of the world and in the agenda and policy prescription of the government the target of economic growth gets a huge significance. One of the major causes behind the success fable of US is the technological superiority of the country. Better technology has always provided the fuel for US economy in the path of economic growth as well as economic development. The technological advancement in US is the major factor behind the widespread competitiveness of US product all over the world and its acceptability in all the countries. Technological innovation has built up the path for the US companies to enter the market of different countries in the different corner of the globe. Hence in the new agenda of the economy at the background of economic turmoil stresses on the policies of technological advancement to ensure economic growth. The specific policy actions prescribed by the planners are: 1. The outdated patent law should be reformed by improving the quality of patents and restoring balance with the patent system. 2. There should be vigorous enforcement of the copyright and trademark laws in both domestic and international spheres. 3. The enforcement officials should be provided better training for the quick detection of iP crime. 4. The citizens should be made more conscious regarding the piracy. Apart from the technological factors the US government has introduced the policies regarding the improvement in competitiveness through workforce which requires: 1. The government should use it funds for providing education to form skilful work force. 2. There should be some immigration reform so that the skilled workers, technical professionals and managers enter into US job market to serve the interest of US. Trade is also known as an engine of growth. Hence, for the growth the government introduced some trade policies: 1. Expansion of trade through a liberalized way 2. Expansion of transparent, technology neutral and open government acquisition policies to stop discrimination against domestic industries 3. Modernization and clarification of export laws for the better export performance The stimulus package was introduced by the government which includes: 1. Tax Reform: According to the supply side economics tax reform is one of the best policies to enhance productivity. That ensures decline in cost of production and more money to finance research and development. Tax reduction provides high incentive for the producers. That also promotes export growth in the country. That’s why the US government introduced the policy of tax reform in the stimulus package. 2. Research: Research and development enables a company to produce better quality of product at a lower cost. Thats why the government has planned to provide enough support for the private entrepreneurs in research. (2009 US Technology Policy Agenda) However, the matter of fact is that still now the US economy is in a turmoil and recession. The economic recession is mainly attributable to the debacle of the financial and housing sector. The problem of non-performing assets has been a major challenge to the US economy. Once the economy is recovered from this turmoil the other policies would really be effective to ensure high economic growth. Works cited 1. 2009 Trade Policy Agenda and 2008 Annual Report, United States Trade Representative, 2008, retrieved on April 18, 2009 from: http://www.ustr.gov/assets/Document_Library/Reports_Publications/2009/2009_Trade_Policy_Agenda/asset_upload_file86_15410.pdf 2. 2009 US Technology Policy Agenda, BSA, 2009, retrieved on April 18, 2009 from: http://www.bsa.org/upload/2009_tech_policy_agenda.pdf 3. Department of Defence, Office of Management and Budget, 2009, retrieved on April 18, 2009 from: http://www.whitehouse.gov/omb/budget/fy2005/defense.html 4. Infoplease, Federal Minimum Wage Rates, 1955–2009, retrieved on April 18, 2009 from: http://www.infoplease.com/ipa/A0774473.html 5. McKeever Institute of Economy, UNITED STATES OF AMERICA: Economic Policy Analysis, retrieved on April 18, 2009 from: http://www.mkeever.com/usa.html 6. Open Congress, Price Stability Act of 2008, 2008, retrieved on April 18, 2009 from: http://www.opencongress.org/bill/110-h6053/show 7. Problems with Current US Policy, International Relations Center, 2009, retrieved on April 18, 2009 from: http://www.thefreelibrary.com/Problems+with+current+U.S.+policy-a0134510389 Read More