Comparative Economic Systems - Essay Example

? Comparative Economic Systems In 2007 to 2009, the US economy had to face the worst economic recession in the history. The financial marketcrashed, housing debt increased, GDP fell and the unemployment rate also increased during that period, igniting a crisis situation within the economy. Although the economic growth and recovery in the US was marked since 2009, in present times, it seems that the growth has become slower but steady. Similar to the US, other nations of Europe has also faced severe effects of the economic recession such as the UK and Germany. In order to deal with the loss experienced by recession, each nation implemented certain monetary and fiscal policies applying distinct frameworks to stabilize their economy. However, the level of growth and recovery has been noticed at an uneven rate in every nation. Hence, it can be assumed that the economic policies applied, might have evidently worked in different principles for each nation. Introduction At present, the US economy is continuing to undergo an average growth and recovery from its recessionary consequences. The recovery started with the growth of its Gross Domestic Product (GDP), but has been decelerated significantly throughout 2011. Several economists referred that to date, the economic recovery of the US is uncertain and disappointing (Byun & Frey, 2012). Furthermore, the GDP rate of the UK is expanding at a modest rate. Confronted with the slow economic growth and recovery, Americans have started to suspend formation of families, acquisition of homes and vehicles among others. Although four years have passed since the recession, the US economy has not observed the superfluous growth that often triggers retrenchment (Miller & Matthews, 2013). Based on this aspect, the essay describes about the economic problem faced by the US. Furthermore, the essay also explains the policy alternatives of the UK and Germany for attaining economic recovery and growth. Policy Responses for the US Economic Growth and Recovery Monetary Policies In order to boost economic stability within the US, the government has utilized conventional monetary policies by reducing the federal funds to about zero for stimulating the economic activity. Subsequently, the rate of federal funds reduced from 5.25% in 2007 to 0.16% in 2008. Since the unemployment rate increased, the government reacted by implementing numerous policies for soothing the financial market and increasing the availability of credit for people and organizations. For example, the US government boarded large-scale asset purchase program and quantitative easing scheme in order to drive down the mortgage rate. These policies resulted in better channel for liquidity and encouraged better confidence among investors (Byun & Frey, 2012). Fiscal Policies The fiscal policies of the government majorly included functions in two grounds namely spending and tax policy. In order to ensure economic growth and recovery, the US government also sanctioned Economic Stimulus Act in 2008, which was intended to deliver tax discounts to households and quicker depreciation regulations for business. With respect to extraordinary actions, the government also enacted Emergency Economic Stabilization Act in 2008 for improving the aggregate capital position of banks and removing troubled assets from balance sheet. Furthermore, government has also extended the unemployment benefits and temporarily reduced the payroll tax to support its failing economic growth (Elwell, 2013). Economic Growth and Recovery in the US The economic recession that was strategically engrossed by the US economy has alleviated due to the adoption of unparalleled policies. During 2010, the deep and long international recession has bottomed out and economic recovery of the US has proceeded. Apart from the US, in Europe, the UK and Germany has also returned to positive economic growth, however applying a distinct policy framework (Cronin, 2013). After the global economic recession, the US economy returned to a positive growth in the third quarter of 2010 and extended at a sharp rate of about 5.7% in the fourth quarter of the fiscal year. Most of the economic growth was the result of curving down the inventory cycle. However, modest growth occurred in majority of spending areas of the US. The financial markets of the US have also recuperated after suffering from the recession. In the housing market, sales of new houses have also started to improve (Cronin, 2013). Different indicators demonstrated that the US economy is still struggling to return on usual industrial footing. For instance, according to Cronin (2013), in January 2010, the unemployment rate reduced to 9.7%, however, others claimed that unemployment compensation stayed inflexibly high in the US (Gangnes, 2010). Projected results in this context advocate that unemployment rate will become less than 7% in the year 2014. It has been long hauled that economic recovery of the US, which began in the mid-2009 has been excruciatingly slow. Employment rate, household income and industrial manufacturing along with house costs have not returned to the degree they were before the occurrence of the economic recession. However, irrespective of the poor pace of economic growth, the recovery proved to be astonishingly robust in the economy (Cronin, 2013). Again, according to the report of ‘Economist Intelligence Unit’ (EIU), the US GDP growth was recorded at 2.5% in 2010, 1.8% in 2011, and 2.8% in 2012. It is expected that the GDP growth will become 1.6% in 2014. Correspondingly, an insightful understanding of the policy framework applied by the US reveals that two key forces are fundamentally pulling the economy; (a) business recovery, which is creating employment and raising the income of the people and (b) fiscal policies, which resulted in increase of tax rate and reduction of government budget (Rapoza, 2013). At present times, the utmost concern about the US economic recovery is identified to be the constant weakness in consumer spending. The retail sales have also been observed to be increasing differently and additional recovery is expected. The sales in automobile segment are also encouraged. The consumer prices has also increased to 1.1% in 2013, which is comparatively lesser than 2010 (Miller & Matthews, 2013). In accordance with the study of Elwell (2013), the speed of economic growth of the US has been slow and irregular. From the second half of 2009 to 2010 the real GDP of the US however increased at an annual rate of 2.5% in comparison with the early phase of economic recoveries in the post-world war period. While the spending on business has been relatively strong throughout the economic recovery, consumer spending has been relatively poor (Taylor, 2012). Appendix 1 demonstrates the potential GDP growth and actual GDP growth of the US in this regard. From appendix 1, it can be observed that the US economic recovery started in the year 2009 and was weak since the beginning. Clearly, the US economy has not yet recovered to the complete potential; however this delay in economic recovery has been quite unexpected. In the American history, the other economic recoveries were quite faster. For example, in the great recession of 1981 to 1982, it takes about 12 quarters to recover the economy. Though, in comparison to present recession, it has been regarded as the worst recovery performance of the US (Taylor, 2012). Economic Recovery Problems and Challenges for the US There are several reasons for guessing that the US economic growth and recovery will be subpar, forced by weak consumer spending. In the past decade, the consumer spending was fortified by increasing house costs and flexible stock markets. Throughout the economic downturn, American families lost about US$12 trillion dollars due to low housing prices and stock market crashes. Several families burdened with mortgages what surpassed the worth of loans. As families worked to recover their economic wealth, their spending on other products and services decreased gradually. Presently, the US has passed through exceptional housing boom; and with conservative lending activities and restricting growth, the economy will probably be restored in the short-run (Gangnes, 2010). The strength of the US economic growth and recovery however remains as subjected to the economic recovery in other segments of the world. Nevertheless, in certain point, it is challenging to unravel the fundamental growth from the impact of large fiscal incentives, which has been utilized in number of nations such as in the UK or Germany. Certainly, the US economic recovery is restricted to some degree with the growth possibilities of other nations. The other important factor for the US economic recovery has been the evolution of commodity prices, especially oil. The spike of oil prices has further contributed to the severity of economic recession. Furthermore, the military confrontation between the US and Iran had also drove the oil prices to a higher level in the economy (Gangnes, 2010). Given the possibility of poor US economic recovery, there might be considerable requirements for additional expansionary macroeconomic policy. The democratic leaders of the US have also proposed employment programs, which were planned to spur recovery. Furthermore, the Federal Reserve has confirmed that it has flexible policies for delivering further liquidity if required. But, the possible requirements for such incentive come up against the realism of growing public liability on one hand and inflationary aspect on the other. Recently, there is also increasing concern regarding the fiscal deficits and future outlays for existing medical and pension programs along with proposed health care advantages. These aspects evidently cloud the fiscal impend in the US (Gangnes, 2010). Concerning the monetary aspects, there is increasing concern, especially in the conventional circle, arguing that the government of the US might have spread the seeds of inflationary flow by enormous formation of short-run liquidity. However, there is no real evidence of inflationary flow in the current economic scenario, while it is expected that inflation would take a quick uptick in the economy of the US. The government of the US has already started to undo certain programs it had previously set up in 2008 in order to reduce the liquidity risks and to remove the threat of inflation from the economy. Yet, a closer look to the situation reveals that there is increasing risk of inflation, which is a crucial concern for the US government and this risk can oblige the government to take less expansionary posture as the economic recovery takes grasp (Gangnes, 2010). Economic Recovery Policies Followed by the UK Similar to the US, the economy of the UK has also experienced a persistent drop in GDP due to economic recession. Although the economy is recovering, the GDP is still low and there is increasing anxiety that the economy is unbalanced could be at risk to further economic downturn in the Europe. Since 2009, the economic growth and recovery of the UK has been regarded as irregular. The key policies implemented in the UK economy growth were quantitative easing and reduction of spending among others (Lee & Jose, 2012). Monetary Policies The government of the UK has used quantitative easing as a part of recovering the economy. However, with respect to quantitative easing, the Monetary Policy Committee (MPC) confronted tough choices in order to support economic recovery and also to maintain the inflation rate at the same time. In the UK, the monetary policy was normally relaxed in the recessionary situation. The interest rate had also reduced with an intention to encourage spending. To rejuvenate the economic growth prospects, the UK government also took due measures to injected money into the economy (Lee & Jose, 2012). Illustratively, appendix 2 demonstrates the lending of small and medium organizations in the UK from 2008 to 2011 as a policy measure to support the income prospects and spending within the economy. Correspondingly, it can be observed that the lending reduced during the post-recession period and in order to stimulate growth, the government initiated ‘Project Merlin’ with the intention of making banks to enhance lending to SMEs and hence, stabilize the business sector as a major contributor to its overall GDP. This monetary policy was believed to enhance the possibility of lending and thereby increase the investment and stimulate economic growth (Lee & Jose, 2012). Fiscal Policies Fiscal policy is used in order to stimulate demand, which in turn can increase employment. To deal with the economic recession, number of fiscal policies was introduced in the UK such as tax cut, investment spending and loan assurance scheme among others. Concerning the applied fiscal policies, the government of the UK required facing three alternatives, which are to spend more or to undertake spending in similar level or to minimize spending. With respect to the UK, the government also used the first alternative i.e. increased spending but not to the expected level. There is an only minor tax cut applied in the framework accompanied with a tight government spending overall (Lee & Jose, 2012). Economic Recovery Policies Followed by Germany Among other G7 nations of Europe, only Germany has been able to regain its economic position to the state prior to the recession period. The economic recession has undoubtedly caused severe damages to the German economy through its reduction in exports. However, currently the German economy has low debts, high trade balance and optimal level of export. It the structural side, Germany has made considerable progress, particularly in the employment segment, which altogether puts it into a distinctive position as compared to the US at large and the UK to a certain extent (OECD, 2012). Fiscal Policies Traditionally, German government was primarily hesitant in introducing fiscal incentive into the economy. However, in 2009, German government passed fiscal incentive bill by emphasizing on tax benefits and spending on transportation and education. Furthermore, due to increased internal demand, Germany currently also possesses the ability to replace export demand to satisfy its domestic requirements (OECD, 2012). Monetary Policies Given the size, German economy has an impact on the European economy that has in turn influenced its monetary policy decisions to a substantial extent. The government of Germany has also maintained low rate of interest in order to boost the growth of business to a substantial extent. Besides, Germany has also channeled the funds through banking system, resulting in high saving and growth of the economy (OECD, 2012). How Different Policies Worked in Various Countries The fiscal and monetary policies have different implications on economic recoveries of various countries. For example, comparing the UK and the US, the recovery of the US economy has been witnessed as much quicker. In comparison with the UK, the US has bounced the GDP at a much stronger level. Appendix 3 demonstrates the GDP growth of the UK and the US since mid-2009 (Posen, 2012). One significant reason for such differences in recovery of the economy was that its sector was much hopeful in the US than the UK. The economic growth of the US mainly arrived from private consumption and growth of investment. The consumption of the US also propagated by 3.8% points in the US after 2009, while in the UK, the consumption is propagated by 0.7%point. Furthermore, the investment of the US grew by 1.7% where in the UK the growth was recorded at about 0.6% during the course of recovery (Posen, 2012). In this context, it can be stated that the source of difference are various small factors, which assisted the US to obtain private investments at a higher rate than the UK. In the UK, two broad aspects have inhibited the investment, which can be attributed as misallocation of credit and ongoing financial and macroeconomic risks in the Euro zone. The other vital aspect, which has impacted the economic growth and recovery of the UK and the US, is contracting real income. Furthermore, the UK has been emphasizing a more tightening fiscal policy than the US, which also resulted in comparative slow economic growth (Posen, 2012). With respect to Germany, it is observable that the strong economic recovery in the nation has been majorly a result of its strong domestic demand. Furthermore, the trade relationship of Germany with other nations of Europe is limited, resulting in added advantage of accelerated economic recovery owing to insignificant dependence on foreign trade. For instance, export represents only 3% of GDP in Germany. Due to this strong position in export, Germany acts as a transmitter to other nations of external economic shocks such as from the US or the UK. Furthermore, the domestic demand of Germany is also determined by investment and innovation, which generated additional employment opportunities and greater prospects for income within the nation, differentiating it from the US (OECD, 2012). Conclusion The present US economic environment has mix implications for different fiscal and monetary policies. On one hand, policies such as tax benefits and quantitative easing have posed desired impact on the recovery of economy; on the other, there is a fear of great inflation. Again, there is high possibility of persistent economic growth, but simultaneously, high risk of increased fiscal deficit is observable in the country. These conditional aspects signify that in upcoming days, there are additional stimulus initiatives, which would be difficult for the US government in order to encourage economic growth. There are also challenges faced by the US government in this circumstance to minimize the fiscal deficit and also to unwind the contribution of money in the economy. In conclusion, it can be stated that the policies taken by the US government must be consistent with the policies of other nations. Indeed a coordinated global policy will probably provide supplementary advantages for the US along with other nations to ensure a quick economic growth and recovery. References Byun, K. J., & Frey, C. (2012). The U.S. economy in 2020: recovery in uncertain times. Monthly Labor Review, 21-42. Cronin, B. (2013). Slow-Motion U.S. recovery searches for second gear. Retrieved from http://online.wsj.com/news/articles/SB10001424127887323300004578559263197557362 Elwell, C. K. (2013). Economic recovery: sustaining U.S. economic growth in a post-crisis economy. Congressional Research Service, 1-27. Gangnes, B. (2010). Alternative policies for US economic recovery. Retrieved from http://www.economics.hawaii.edu/research/workingpapers/WP_10-2.pdf Lee, O., & Jose, T. (2012). How can we stimulate growth in the UK economy? Norwich Economic Papers, 5, 1-16. Miller, R., & Matthews, S. (2013). The U.S. economic recovery: long, slow, but still going. Retrieved from http://www.businessweek.com/articles/2013-06-13/the-u-dot-s-dot-economic-recovery-long-slow-but-still-going OECD. (2012). OECD economic surveys Germany. Retrieved from http://www.oecd.org/eco/49616833.pdf Posen, A. (2012). Why is their recovery better than ours? (Even though neither is good enough). Retrieved from http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech560.pdf Rapoza, K. (2013). U.S. growth rate worse since recovery. Retrieved from http://www.forbes.com/sites/kenrapoza/2013/08/23/u-s-growth-rate-worse-since-recovery/ Taylor, J. B. (2012). Government regulatory policies and the delayed economic recovery. Retrieved from http://judiciary.house.gov/hearings/Hearings%202012/Taylor%2009202012.pdf Appendices Appendix 1 Figure 1: Potential GDP Growth and Actual GDP Growth of the US from 2007 to 2012 Source: (Taylor, 2012) Appendix 2 Figure 2: Lending of Small and Medium Organization in the UK from 2008 to 2011. Source: (Lee & Jose, 2012) Appendix 3 Figure 3: GDP Growth of the UK and the US since Mid-2009 Source: (Posen, 2012) Read More