Economic Objectives of the United States over the Last Three Years - Case Study Example

Economic Objectives of the United s over the last three years Over the last three years the US Government has learned numerous lessons of the global crisis that has ended up in the failure of macroeconomic policies. It would not be wrong to say that the economic roller coaster through high mortgage and unfavorable inflation rates has slowed down the economic activity where unemployment claims have risen to their second highest level since 2005 (Savage, 2008). Washington Times indicated last year that there is a threat of Stagflation which would escort to an unusual economic condition resulting in rising prices, inflation and stagnant economic growth (Savage, 2008). Stagflation was once witnessed in the economic turmoil of the 1970s due to which economic imbalance was experienced. However despite the economic consequences of policies, we explore in this paper to what extent macroeconomic policies have remained successful or unsuccessful over the last three years in the light of economic objectives to cover unemployment, inflation, expenditure and balance of economic growth. Unemployment Unemployment is the foremost macroeconomic indicator that within any economy irrespective of per capita GDP is responsible for deriving income from labor market earnings. With falling living standards and rising unemployment, the macroeconomic policies have failed to lower down the rate of unemployment as the rate of unemployment in 2007 was 6 million which in 2008 has risen to 9 million and is still keep on increasing during this economic recession. Avila & Usabiaga (2007) points out that macroeconomic policies have permanent or long-lasting effects on the unemployment rates of various US states (Avila & Usabiaga, 2007). However the impact of such policies and their persistence to our economy indicates that a high degree rise in unemployment is due to the restrictive demand policies that have become permanent component of the economy, thus leading to a higher natural rate of unemployment. This way the macroeconomic results have suggested that the prevailing tendency of U.S. state unemployment rates to fall from the high level was only witnessed after the first oil shock which also gives an indication that labor market reforms and stabilization policies have been implemented in the right direction (ibid). Policies regarding public finance claims that only the most central, national government can successfully manage US economys macro-economic swings and the resulting unemployment of labour and economic resources. The macroeconomics in this case does not held itself responsible for the inability to alleviate unemployment because it suggests that the mobility of factors of production in any economy and the inclination of a regions residents to spend their incomes on imported goods are responsible factors behind the raised unemployment rate (Inman & Rubinfield, 2001). Unemployment Compensation programs in the light of policies have been relatively modest in scale that has covered potential benefits during all these years of recession, however their duration is short and replacement rates are generally low. Recipiency rates are also relatively low (Vroman & Brusentsev, 2005: 145). The policies advice that many aspects of these programs highlight the association between inflation and Unemployment Compensation replacement rates without effective indexation provisions, high inflation would quickly erode the real value of monthly benefits (ibid). The main factor that explains why international trade and capital movements instead of other economical concerns have become a major concern of senior policymakers in the United States is the acceptance by all governments of responsibility for how well or poorly the domestic economy performs. The policymakers claim that the electorates demand for a steady increase in the standard of living indicates that any policy that significantly affects domestic economic performance is an important variable in determining who is president and which party controls the legislative branch (Cohen, 2000: 34). The primary domestic economic objectives that includes growth and full employment requires that US achieves its social objectives in a non-inflationary environment. However, the lack of a growing work force or profitable corporations has limit the size of the tax base that generates the income to finance the social safety net of income support (retirement income, health insurance, unemployment compensation, welfare, etc.) that all democracies are expected to provide. The dilemma is that no government yet has been dedicated to fully entrust the invisible hand of the free market with the job of achieving the level of domestic economic performance that will please voters and sustain the political status quo. Inflation The economic policies concerned with the asset price bubbles and leverage increases have though witnessed huge bursts over the last three years, but still many economists suggest now is the correct time for implementing stronger monetary policy decisions to implement longer term implications for a sound economic growth (Blanchard, 2009: 2). This itself is a prove of how unsuccessful has been the macroeconomic policies in maintaining a stable flow of inflation. Since current macroeconomic environment is weak to detect the emerging banks crises, low GDP growth, high inflation, depreciation of the exchange rate and high interest rates increase the probability of the systemic problems in the banking sector alone (Alexander et al, 2006: 208). Macroeconomic instability has also detect that banking sector has been on a constant systemic risk with an increase in the nonperforming loans and short term interest rates has caused devaluation in foreign currency borrowing and local currency lending. Macroeconomic policies have tried hard to target inflation by adopting monetary policy strategy focused on acquiring a designated low rate of inflation. Low inflation had always been among the primary objectives of the Federal Reserve, for which other central banks also strive hard without even mentioning it among explicitly stated objectives (Mccallum, 2007). Unfortunately discretionary macroeconomic policies and a volatile environment of the US were closely related to awkward policies such as excessive government spending, high inflation, and an over-valued exchange rate render an economy prone to crisis. United States Government has always believed in broad consensus that exist on the utility of inflation-indexed or inflation linked bonds for which economists and policy makers make the sharing of risk between issuers of bonds and investors possible. In this context financial markets in the emerging market economies are deepened and when an emerging market government issues inflation-indexed bonds, this is seen as reducing the cost of educating the global investors regarding the benefits of these instruments (Das, 2004: 111). Though such policies in the past have reduced the co-ordination problems, but has left the most frequent areas devoid of discipline and these are the regulatory norms and supervisory structures. Today, the way US is breathing an unstable macroeconomic environment, these vulnerabilities of the financial sector readily spawn a crisis because distortions in the real economy and serious macroeconomic policy failure also produce the same results, adversely affecting the price signals and incentives structure of a market. Expenditure According to Sipri (2009) “The US military spending accounted for 45 percent of the world total in 2007” (Sipri, 2009). The macroeconomic policies or the economic crunch being witnessed for the last few years has not affected US military expenditure, since it has kept on increasing by 59 percent since 2001 and it is obvious that such increase reflects massive spending on military operations in Afghanistan and Iraq, however it also includes increases in the ‘base’ defence budget (Sipri, 2009). The relationship between US. Revenues and expenditures has remain an essential component of the macroeconomic policies that helps deciding the policies to understand the future path of the budget deficit. The budgetary process as mentioned by Ewing et al (2006) suggests that federal government revenues and expenditures are amalgamated and with an asymmetric adjustment process of the budget, this situation suggests that the speed of adjustment when the budget is worsening is higher than when it is improving (Ewing et al, 2006). Furthermore Ewing et al (2006) through research illustrates that the results obtained suggest that revenues and expenditures respond to a worsening of the budget, but not to an improving budget (ibid). Expenditure Reduction or switching In the aftermath of a crisis on American economies, the affected economy was faced with a difficult decision regarding how much of the impact on the trade balance should be financed by borrowing from the global market. The government offered many alternatives to offset the gap by the adjustment of macroeconomic policies. However economic theory provided guidance in this regard and it was decided that if the crisis is judged to be largely transitory, borrowing from the global capital markets should tide it over. On the contrary, if US economy failed to do that, official and bilateral sources of finance should be tapped and in case a gap in financing persists, the IMF should supply the remaining capital. Undoubtedly the IMF would only lend conditionally, on ensuring that the borrowing emerging market follows sound economic policies and rectifies structural imbalances. The theoretical scenario was not as it was expected and the economic crises during the last three to four years have witnessed that private capital flows from the global market had a penchant to exacerbate the real adverse shocks rather than offsetting them. Many economists claimed that global capital inflows should be counter-cyclical, but since they are implemented as procyclical, therefore two sets of policy instruments had to be considered: expenditure-reducing policies and expenditure-switching policies. These policies are further determined by monetary contraction, and currency depreciation, however these policies target the internal balance and external balance respectively. The good thing is that both are utilized by the Government in improving trade balance and making domestic assets more attractive to global investors. However many critics of the IMF rescue packages contend that the monetary contractions resulting from the prescriptions of the IMF has created recessionary conditions in the crisis-affected emerging markets (Das, 2004: 120). The balanced opinion requires that a policy of a lower interest rate with currency depreciation would result in achieving the target of internal balance in the crisis economy, without creating recessionary conditions. Thus, high interest rates are irrelevant because they cannot succeed in attracting global investors when there is a high probability of default in a crisis-affected economy and it has proven to be correct. On the contrary history tells us that no economy has been able to conceive attracting global capital by lowering interest rates. This can also be observed that in some of the recent crisis economies, exports did not accelerate as expected because of the reason that supply-side machinery was in disarray, which in turn was caused by corporate financial distress. Current economic policies are also paving way to the unavailable trade credit where imports would become more expensive in terms of domestic currency, and production targets for more needed exports could not be met. United States history has witnessed it under the rubric of expenditure reduction, not expenditure switching which further elucidates that despite rescue packages, there is little possibility of escape from a short-term recession. Balance of Economic Growth The last three years have been tough on economic trade and balance and even the Governments tax reduction according to the Wall Street Journal fault it on two principal counts, too large, and unfair because the resulting benefits accrue disproportionately to high-income earners. Tax cuts were not focused and lacked smaller budget deficits, due to which US. Government suffered an economic decline with estimated future budget surpluses to pay down the federal governments $3.4 trillion of publicly-held debt in a time span of 10 years (Wall Street Journal). Previous governments plan was to accelerate debt reduction but this was only possible with smaller but stable tax reductions, and since the benefits of debt reduction were no less concentrated on high-income earners than are the benefits of tax reduction, therefore the underlying issue of how fairness should be analyzed is unresolvable because of its subjectivity (Wolf, 2002: 68). Economic growth not only depends upon employment and inflation rate, but how the various various magnitudes of trade transactions, increasing leverages and capital flows, are based on the fiscal policies. One can provide adequate reasoning that trade and capital transactions have been subjected to wide fluctuations, but one can question about those budget deficits that never were reduced during these years. Higher revenues have limited fiscal space and trade has been distorted through national policies and subsidies to raise exports and tariffs or non-tariff barriers to restrict imports. Therefore contemporary macroeconomics must adhere to those fiscal and monetary measures that are at least risk of entailing macro-financial instability. References Alexander Kern, Dhumale Rahul & Eatwell John, (2006) Global Governance of Financial Systems: The International Regulation of Systemic Risk: Oxford University Press: New York. Avila Diego Romero & Usabiaga Carlos, (2007) Unit Root Tests, Persistence and the Unemployment Rate of the U.S. States, Southern Economic Journal. Volume: 73. Issue: 3, p. 698. Blanchard Oliver, (Feb 19, 2009) International Monetary Fund, accessed from Cohen D. Stephen, (2000) The Making of United States International Economic Policy: Principles, Problems, and Proposals for Reform: Praeger Publishers: Westport, CT. Das K. Dilip, (2004) Financial Globalization and the Emerging Market Economies: Routledge: New York. Ewing T. Bradley, Payne E. James, Thompson A. Mark & Al-Zoubi M. Oman, (2006) Government Expenditures and Revenues: Evidence from Asymmetric Modeling, Southern Economic Journal. Volume: 73. Issue: 1, p. 190. Inman P. Robert & Rubinfield L. Daniel, (March 2001) accessed from Mccallum T. Bennett, (2007) Inflation Targeting for the United States?, The Cato Journal. Volume: 27. Issue: 2, p. 261. Savage Henry, (March 7, 2008) Fears Rise of Possible Stagflation, The Washington Times, p. F14. Sipri (2009) accessed from Vroman Wayne & Brusentsev Vera, (2005) Unemployment Compensation throughout the World: A Comparative Analysis: W.E. Upjohn Institute for Employment Research: Kalamazoo, MI. Wall Street Journal, accessed from Wolf Charles, (2002) Straddling Economics and Politics: Cross-Cutting Issues in Asia, the United States, and the Global Economy: Rand: Santa Monica, CA. Read More