Economic Policies of America - Essay Example

Economic Policies of America Economic Policies of America There is an intimate link between politics and economics in the sense that the force that derives politics in a capitalist economy is the desire to accumulate wealth continuously. This concept of economic and political affairs is what Wallerstein (2005), refers to as the “Modern World System.” The idea is slightly opposed to the assumption; an economy of a country and politics link, in the sense that politics influence the function and nature of the economy both locally and internationally. In the case of America, the two periods of Post World War II era to 1970s and the late 1970s to the 2007- 2008 financial crisis had different economic policies that were based on different theoretical frameworks. Post War II to 1970s The condition that led to capital accumulation between the years 1940 and 1970 and the development of “welfare state” in the economies that were centralized within Western Europe, United States, and Japan is known as the ‘Golden Age’. During this era, the world economy came up with conditions that ensured very high investment rates, high growth output, and low inflation and ensured low unemployment (Robert, 2002). The United States Action is based on the Keynesian Revolution theory. a) Keynesian Revolution Theory and Link to Economic Policy In the United States Revolutionary theory was a basic change in the divided economic view to a framework that is more unified. The main idea was that a policy should be changed in a way that it would change the unemployment level through deficit spending scenarios such as tax cuts on the industries and public works and also changing the interest rates and the way that money was supplied. The main idea here was that the government could change the level of employment among its citizens. This theory holds that employment is not a function of supply, but demand (Keynes, 2006). Despite the many things that this theory did not cover, America as the super power country decided to come up with policies that were to ensure that there was increased demand for their products. The United States acted among others ensured that there was a common global market with the aim to increase the demand for their products (Keynes, 2006). The theory was adopted by several governments, including the United States of America. This is what led to the formation of institutions like the International Monetary Fund and World Bank. b) Institutional Mechanisms The second was after 1950 when United States policies’ emphasis shifted to containing the world through military, a strategy that enabled a global presence of American military and the Korean (1950- 53) and Vietnam War (1957- 75). United States took a head role in the Bretton Woods Agreement organization as a way to accommodate the portion of the United States government and the class of capitalists that suggested long lasting international arrangements that would see the global capitalism being rebuilt and regulated (Gloves Off, 2004). This led to the establishment of new international institutions: Stability of Exchange Rate and Gold Standard Return: One of the main idea in the Bretton Woods was to stabilize the exchange rate so as to avoid “beggar they neighbor” kind of policy (Keynes, 2006). This was to be accomplished through devaluation of the currencies in a competitive manner so as to ensure that exports were boosted. It was also to ensure that unilateral devaluations were avoided at all costs, thus a “gold standard” system of exchange rate. This meant that the value of a dollar the international system core, thus currency devaluation required consent from America. International Monetary Fund Creation: International Monetary Fund was established so as to see that trade deficits in finance were helped and in the process prevent recession. The IMF would manage a centralized resource pool that was to be used in case a member country faced a non- permanent crisis during payments. The IMF since then became a main contributor to the American economy (Keynes, 2006). General Agreements on Tariffs [GATT] and Trade and Free Trade: The GATT is where the new trading terms were written and signed in 1947. This was later changed to be World Trade Organization in the year 1995 (Keynes, 2006). GATT gave the sole authority that directed that all tariffs to be done with. This move saw that all the markets around the world was opened for the American products. Lastly was the; World Bank Establishment: The main aim of World Bank creation was to ensure that destroyed countries were reconstructed and developed through issuance of finance to the countries of post- colonial (Keynes, 2006). The middle class having increased their rate of consumption ensured that there was a market for the goods and services that were produced by the United States of America. To increase this market, the United States came up with policies that ensured that they had a global market to sell their goods and services thus making it to become more industrialized compared to other societies (Keynes, 2006). c) Main Actors and their Roles The main actors of the Golden Age were the bourgeoisie, the middle and upper organized group of working class was controlled by the state in the Keynesian monetary and fiscal policies. Gains were redistributed thus increase in the real wage due to the policy (Gloves Off, 2004). The product of this was increased with the demand of the middle class, thus growing the market for goods. This enabled mass production that can now be seen as the fundamental characteristics of industrialized countries in the modern world. America’s immediate post World War II government policies had two main goals; the first was to contain politically and economically the influence of the Soviet Union in Europe, which was seen as the most regions of economic importance in the globe. The idea led to the development of the western part of Europe as a way of reconstruction after the World War II through transfers of money and investing directly for example the short term Marshal Aid that lasted for four years. The aid cost was $ 13.365 billion. This form of aid financed 57% of imports in Germany (1947- 49) thus making it have a GDP of 2.3% in those five years and have a peak of 5%, thus enabling Germany to get back to its pre- war level of production in three years only (Gloves Off, 2004). d) Impacts The product of this was that the United States’ economy recovered that had fallen to the lowest level in 1961. The same time, it is undeniable that the rates of profit fall in a continuous and clear manner until the end of the 1970s due to the United States international relationship dramatic shifts. The policy made the United States of America to rely on the external economies so any shift in a relationship meant some impacts on the American economy. By the end of 1950s, America enjoyed the first largest trade surplus with the GNP growing to $ 482.7 billion. In the 1960s real income of the country rose by 50%and foreign investment in 1965 reached $ 49 billion, up from the 1950 $11.8 billion (Gloves Off, 2004). Late 1970s to the Crisis of the Financial Crisis of 2007- 08 This period was commonly known as stagflation. This is a condition in economics that is characterized by both progressive inflation and business activities that are stagnant, which automatically lead increasing rate of unemployment with a continuous price increase on commodities (Collins, 2002). The reaction policies were therefore based on the Hegemonic Stability Theory. 1) Hegemonic Stability Theory and Its Connection to the United States Economic Policy According to the Hegemonic stability theory, development and running of a liberal and open global economy like the one that characterized most countries since the World War II end requires a leader that is powerful and given the fact that America emerged super power nation after the World War I they had the capability as a leading country to see it happen. The leader is expected to use its influence and power to promote the liberalization of trade in the world. The leading nation is also expected to promote an international monetary functional system that is stable so as to see that its economic and political interests (Robert, 2002). In this case the system is the International Monetary Fund. In rare occasions, United States of America as the leader is allowed to coerce the states that are reluctant so as to see that they comply with the rules that ensures a liberal global order in the sphere of economy and must ensure that they cooperate. The rest of the states are to cooperate with the system since that is their only way to ensure that their security and economic interest is met. A good example is that even though America played a crucial role in the development and managing of the world economy after the World War II, it was only possible through the cooperation of its allies during the Cold War (Robert, 2002). According to Kindleberger, any kind of decline in the part of the leader, America in this case, leads to an automatic reduction of the cohesiveness of the parties that govern the world economy that is liberal. This explains the reason why the United States is not ready to open market for employment, but to do whatever in its place to ensure that they still control the liberal forces (Robert, 2002). With the reduction of power, there is a decline in the ability of the United States of America to enforce the liberal world rules later lead to increased protection of trade and violations of the rules that govern the international commerce. In 1990s, there was manifestation that the United States economic decline was the reason why the global economy was divided into the regional blocs like the European Union. This simply means that there is a steady erosion in the liberal world with the countries coming forth to challenge the leadership of America (Robert, 2002). The main idea of this theory was to ensure that United States come up with policies that ensured that the economic status of the country was stable during the period of economic recession. 2) Institutional Mechanisms Decline in the economic power in part of the United States of America led to policies that ensured that the economy was not going into deep recession but stabilization with future rise. Labor contracts came to automatically include clauses that are related to the cost of living so as to respond to the inflation rate (Robert, 2002). Payments such as social security were pegged to the Customer Price Index so as to gauge the inflation rate. There was an increase in the America’s budget spending during the 1977- 1981. Policies were put in place to ‘deregulate’ several industries such as airlines. The interest rates of banks were later given a break through relaxation of controls ad in 1990s, the telephone service regulation in America was eased. The main institutional mechanism was the development of the Federal Reserve Board, which regulated the money supply since 1979 thus making the interest rate to rise which later lead to deepest recession. 3) The Actors and their Roles. The government and the big businesses were the most powerful forces in the economy. These were the two main actors that were involved in the policy formulation and decision making. The big businesses influenced the decisions of the government since they were the economic determinants of the America due to employment and the revenues that they brought forth (Robert, 2002). 4) Impacts America’s economy experienced a downturn in the years of 1970s. Japan and other European countries decided to challenge the dominance of the American industries with the 1973-1979 and 1979 oil crisis shaking the confidence of the of both the business and government institutions. This led to the service sector and small businesses to be seen of importance. In 1980- 1984, America went through the severe recession followed by a robust recovery. There was a decline in inflation rate with more jobs being created. By the year 1992, America had a total deficit of $ 290 billion due to increases in the military budget. The real estate industry boom collapsed. The share of America’s income that was received by richest American families rose (18. 6% to 24.5 %) while that of the poorest fell (20% to 4.3%) in 1977. The United States economy got into a recession in the year 1990 leading to unemployment. Since then there has been several attempts to see that the American economy gets back to its glory (Collins, 2002). Solutions to the America’s Recession There is a need to ensure recession and to see that there is a recession in the United States economy, is needed to ensure that the market share strategized so as to the needs of Americans first and foremost. America must take the sovereign rights of their domestic markets from the international bodies, for example, the World Trade Organization and other players that practice a “one way free trade” like CAFTA, NAFTA and KORUS. The policies should be set in a manner that protects the wealth and resources of the citizens. The industries should be rebuilt immediately if the America’s financial and economic independence is to be restored (Economy in Crisis, 2005). The American government should make it profitable to produce goods and services by employing American citizen in American factories. The policies should ensure that the sales of the main assets to entities that are foreign are halted. The chances that allow foreign companies to compete unfairly with the American companies should be halted. The spending should be controlled and initiative controlled by foreign debts shouldn’t be given priority. There is need to liaise with competitive countries like China, and see how they have managed to challenge America with the suitable policies being copied (Economy in crisis, 2005). These policies can be categorized into three main fields: Defense The government should protect the assets like industries and companies and resources against the foreign countries and companies that have the aim of controlling the main industrial and technological processes. This includes and not limited to the prevention of the sale of United States domestic companies to the foreign players and making sure that outsourcing (offshore) is limited (Economy in Crisis, 2005). Trade that is Fair The trade treaties that the United States gets into should be ones that protect the country from predation on the part of other countries that have the intention of weakening or destroying the United States industries (Economy in Crisis, 2005). This should be done through ensuring that tariffs are erected whenever necessary. However, since the expectation of other countries, to adopt the United States policies, is an impossible dream there in a need to ensure that their policies impact does not affect the economy adversely. The most effective way to ensure that this happens is through putting in stringent tariffs on those countries’ exports this will ensure that the United States debt, demand is decreased, which will later be carried off by the fact that the local entrepreneurs and industries will in a short duration start enjoying the incentives that will see the revival of the industrial base. Ensuring that the domestic industry is competitive The American companies should be aligned with the interest at the national level through ensuring that the industries and companies benefit from a good incentive system. The structure of taxation should be changed in a manner that encourages the revival of industries more so among the industries that were worst hit by the foreign completion that is unfair. The policies should also ensure that the schedules of depreciation during research and capital investment are shortened. In the same footing, taxes related to capital gains need to be increased so as to discourage any thinking that is short term and see that there is reduction that will make entrepreneurs to bail out (Economy in Crisis, 2005). There is a difference in the policy development in the United States the period after the World War II to 1970s and late 1970s to 2007- 2008. The policies in the period after World War II are driven by the Keynesians’ Revolution Theory while the period starting late 1970s is governed by the Hegemonic Stability Theory. These policies are meant to suit the situation of the United States at those two given moments. The Revolution Theory main aim is to develop a market for the products while the Hegemonic Stability theory sees to it that the economy of America is stable during the time of economic recession (Goodwin, 2001). References Wallerstein, I. M. (2005). World-systems analysis: An introduction. Durham: Duke Univ. Press. Keynes J. M. (2006). The general theory of employment, interest and money. Atlantic District: Atlantic Publishers. Gloves Off (2003- 2004). The post-world war ii golden age of capitalism and the crisis of the 1970s [1940s-1970s] Retrieved from http://www.glovesoff.org/features/gjamerica_1.html Robert G. (2002). The Rise of American Hegemony. Two Hegemonies: Britain 1846-1914 and the United States 1941-2001, [Ed.] Patrick Karl OBrien and Armand Clesse (Aldershot: Ashgate Publishing, Ltd.), 165-182 Collins, R. M. (2002). More: The Politics of Economic Growth in Postwar America. New York: Oxford University Press. Economy in Crisis. (2005). Economic Crisis. Retrieved from http://economyincrisis.org/solutions Goodwin D. (2001). The Way we Won: Americas Economic Breakthrough During World War II. Retrieved from http://prospect.org/article/way-we-won-americas-economic- breakthrough-during-world-war-ii Read More