Economic problems of the USA - Essay Example

?INTRODUCTION: The report is designed to discuss the economic problems of US for the last few current years and the causes of the problems in reference to the article “Economic Problems Facing the U.S.” by Thomas Heffner (2012). The impact of the problems on the US economy, society and political environment are also discussed in this report. AS-AD model will be used to determine the aggregate demand and supply of the country. The report also highlights measures taken by the government to recover from the economic problems along with the reasons behind government’s decisions for such measures. The evaluation of effectiveness and shortcomings of government measures is done to explore the net benefit of the measures to economy. The report will attempt to suggest the solutions of US economic crises of manufacturing concerns, balance of imports and exports and economic sustainability of the country. SUMMARY The Article reports about economic problems faced by the U.S. since almost past decade. The United States is going through the economic adversity or disaster on a very high scale for the last decade. The article refers that despite suffering, majority of people of U.S. are giving less or no attention to the sources of the current economic decline (Heffner, 2012). The article states that U.S. nation has become a second class country in many aspects Reasons cited in the article for the above statement includes facts that United States no longer produce what they require to sustain their selves; the extensively increased imports than exports resulting in selling off U.S. assets and taking on huge debts to maintain a living standard. The article also refers to an important aspect of the US condition in international context. IT refers that it is the game plan of the US global challengers is to make the US totally reliant on overseas manufacturing, modernization and financing. In losing domestic self-reliance, nationalized security and power – the foreign affairs of a country will suffer to a great extent. Referring to impact of the current situation, the author of the article states that US is getting weakened even to admit greedy foreign trade practices bringing in depression US industry. Instead the economic players are giving confidence to US manufacturers to plan, engineer, and manufacture in third world markets to minimize the production cost like Mexico and China. The article in addition to the problems being highlighted has also referred to the solution such as carefully managing access to market, re-assessing trade practices etc. (Economy in Crisis, n.d.). DISCUSSION OF THE ECONOMIC PROBLEMS ISSUES: Causes of Problem: High labor wage rates in U.S.: U.S. is facing challenge of high labor wage rate for the last few years due to which the cost of production or manufacturing in the US increased. To survive competitively in this situation U.S. started to shift its production or manufacturing plants in low wage rate countries like China and Mexico where cost of production is significantly cheaper as compared to U.S.. This prevailing situation in the economy bringing down the US manufacturing sector continuously giving rise to import and pressuring the import bill. Service sector growth downsizes the manufacturing and production industry: In the last two decades a big portion of investment in the U.S. have been shifted towards the service industry sector because of high manufacturing cost and low margin profits. The service industry of US is contributing 79.7% in the economy, 1.2% is the contribution of agriculture industry and 19.1% by manufacturing industry (CIA, 2012). With this huge side transferred to service sector it has made the manufacturing side weaker in the US and hence large number low wage labor force in US has become unemployed. Higher imports from china and other countries because of low cost: the prevailing situation in the economy of US for the last two decades has increased the percentage of imports over exports in the economy. The final manufactured goods are the major imports of US consistently increasingly import bill. The high wage rate in US also forces US to import goods at lower cost from China because China has a very cheap cost of production (Becker, 2012). IMPACT ON ECONOMY, SOCIETY OR EVEN POLITICAL STABILITY The downsizing and with low growth in manufacturing sector has shifted investments to service sector in U.S. This has affected the US economy in many ways such as the demand of employees in the manufacturing sector decreased. Employees with manufacturing skills and proficiency are left unemployed leading to the rate of unemployment increased in the US. US sending raw material to china to manufacture goods at low cost and then importing it back in the form of finished goods. This along with unemployment has also increased import bill. High imports have also affected the capacity of US in terms of research and development etc. The low growth in manufacturing sector has also affected the consumers and society in large number of ways. The increasing imports cause the increase in the rate of inflation or increasing the consumer price index. In the end the consumer is surviving with high prices. The people in the society with the manufacturing proficiency are also facing the challenge of unemployment. This unemployment causes corruption in the society and also increasing the US government expenses on the allowances for unemployed people. In addition, decline in manufacturing has also affected the innovation capabilities of the society. Economic condition of country is deeply connected with its political structure. If the country is going through the uncertain circumstances or political instability it will directly affect the economic conditions of a country. Similarly, if the economic growth and sustainability is poor in the country then it is also difficult for the government to survive for a long period. Hence, both the variables influence on each other. The stability in the society or social behavior is the reflection of stable political environment in the country. Low growth in the manufacturing sector and higher imports destabilized at some extent the position of the government in the US and US government is constantly under high pressure for rising misbalance in society resulting in burden on the economy (Alesina, Ozler, Roubini, and Swagel, 1996). USING AS-AD MODEL (Adapted from: Arnold, 2008) The low manufacturing growth in the US decreased the aggregate supply of domestic products. The impact of short supply of domestic production raises prices as to new equilibrium with AS1. This new equilibrium increases the prices with limited supply and rise in demand. This short of supply also increases the level of imports in the economy to meet the demand. The low growth of gross domestic product and increase in the imports raises the prices of goods in the economy causes inflation. The inflation directly affects the living of standard of society as higher price affects the purchasing power of the people. This graph illustrate that the raising demand and the low growth in GDP causing the high prices in the society and consumer is surviving (Mankiw, 2009). The similar conditions of decline in local supply due to reduced manufacturing has pressure US economy with high priced imported products. GOVERNMENT POLICIES AND REASONS: Economic conditions of country are mere reflection of government policies in managing countries resources and expenses. Role of US government policies in the economic conditions of the country and measures to overcome issues are discussed below: 1. President Obama Administration is spending on education sector, research & development and technological advancement to develop the wealth of US for the longer time period (OFA, 2013). Reason: Manufacturing is a necessary element of the financial system for the reason that it flashes innovation, produces higher-wage employments, and makes stronger whole communities. Later than declining for more than a decade, the manufacturing sector of US economy has recovered lead by President Obama’s set free of the auto production. The auto sector of U.S. generated 479,000 manufacturing employments as of January 2010. To put up on this improvement, President Obama set an objective to produce 1 million fresh manufacturing jobs through the ending of 2016 and is functioning to twice US exports above the upcoming five years by encouraging U.S. goods and eliminating trade obstacles. 2. President Obama Administration slash taxes for all American employees and presented 18 tax cuts for small companies to facilitate revival from recession. The policy is also requiring rich people to pay higher taxes to balance the tax ratio (OFA, 2013). Reason: The policy has set onward a precise, balanced arrangement of expenditure cuts and returns increases for diminishing the shortfall by more than $4 trillion in the period of the next decade together with cuts of $1 trillion in expenses. This plan will impact well on the living standard of middle class people of US. The reserving amount of expenditure will be used in manufacturing sector to improve the performance of economy or to improve the balance of trade of the country. 3. Ending subsidies by the government for oil companies and making investments in cleaner sources. With this US will be become a worldwide leader in clean energy sector along with generation of jobs and businesses in the sector (OFA, 2013). Reason: Rise in manufacturing has led the extensive use of cheaper natural gas. , Obama Administration aims to develop this plentiful source of American energy for sustaining in long term more than 600,000 jobs by end of current decade. It would appreciate the employees with proficiency in production or manufacturing sector resulting in rise in local manufacturing employment and standard of living. EFFECTIVENESS AND SHORTCOMINGS Effectiveness of Policy The policy implementation will decrease the rate of unemployment in the US. The investments made on the manufacturing sector instead of subsidies in oil sector will improve its growth rate of GDP and will turn the economic recession in to economic recovery. The exports of finished goods will be increased and imports of country will decrease and will positively sustain the balance of trade. The tax diversion from middle class to rich will improve the living standard of middle class society and reduce the parity in society. Shortcomings of policy: Ending the subsidies on oil companies will cause increase in the prices of oil in the US. It will directly impact on the consumer price index. Revised oil prices will bring inflation in the consumer market. The increased tax rate on the rich class will discourage them to make high investments and expenditures affecting growth. The challenge of producing 6 million skillful workers for the manufacturing sector to meet the demand of upcoming 6 million jobs in this decade as economy has increased service orientation. USING AS-AD MODEL FOR ILLUSTRATION Under consideration of new economic policy by Obama Administration it would impact the aggregate demand and supply of the following factors: It would increase the rate of manufacturing goods or increasing the aggregate supply of domestic products instead of importing to meet the demand. Demand of imported products would get decreased bringing down the prices of goods in the US consumer market. Increase in supply will also reduce price pressure that arises from importing goods. The exports of finished goods will be more than imports which will reduce the trade deficit of a country. CONCLUSION The economic recession faced by the US for the last two decades is now in the process of economic recovery after the implementation of Barak Obama’s new economic policy for the economic recovery. The downfall in the manufacturing sector was weakening the US economy. The increased imports of goods brought inflation in the consumer goods prices in the US market. The unemployment also increased with a high rate. As a whole, decline in manufacturing contributed significantly in the US economy’s recession. However, implementation of current economic policy things have started change and bringing back the US economy towards economic growth. After the implementation of current policy the manufacturing industry has gained growth rate along with the fast pace employment generation in the economy. The practices of policy will reduce the trade deficit by decreasing imports and increasing exports of goods. The aggregate demand and supply of manufacturing goods is discussed in the frame of AS-AD model. The model has analyzed the changes in the economy and impact of those changes on the consumers and society. The policy will be beneficial for the next five year’s developments in the country and will contain the US economy in the long run of prosperity. The policies discussed also have some dark sides as well but in overall view the policy will be very advantageous in the recovery and growth of US. Hence, with the resolution of problem of US economy that originated from the decline in the manufacturing sector will resolve with the revival of manufacturing sector. List of References Alesina, A., Ozler, S., Roubini, N., and Swagel, P. (1996). Political instability and economic growth. Journal of Economic Growth, vol. 1, no. 2, pp. 189-211. Arnold, R. (2008). Economics. Mason, OH: South-Western Cengage Learning Becker, G. (2012). Concern about the decline in manufacturing in the United States? Available from http://www.becker-posner-blog.com/2012/04/concern-about-the-decline-in-manufacturing-in-the-united-states-becker.html [Accessed 24 June 2013] CIA. (2012). GDP composition by sector. Available from https://www.cia.gov/library/publications/the-world-factbook/fields/2012.html [Accessed 24 June 2013] Economy in Crisis. (n.d.). Economic Solutions. Available from http://economyincrisis.org/solutions [Accessed 24 June 2013] Heffner, T. (2012). Economic problems facing the U.S. Available from http://economyincrisis.org/content/major-economic-problems-facing-united-states [Accessed 24 June 2013] Mankiw, G. (2009). Principles of Economics. Mason, OH: South-Western Cengage Learning OFA. (2013). The president’s plan for an economy built to last. Available from http://www.barackobama.com/issues/ [Accessed 24 June 2013] Read More