Your View of Recent US Macroeconomic Performance: Design a Policy - Essay Example

Econ 201 Introduction to Economics A view on the recent US macro-economic performance Output and demand. There are circumstances that explain why the economy has remained weak and strong. For instance, consumer spending has been weak because its growth has been slow. As of February 2010, there is only 1% growth of disposable income, and out of this, only 0.5% is allotted for consumer spending, 3% is allotted for savings and the rest is for other expenses.(BEA) The consumer spending has been weak because it has been affected by 9.7% unemployment rate, which is the highest level in 5 years (Trading Economics) and the continued loss of jobs. On the other hand, the government spending has been strong in personal welfare. Government spending has gone up for personal benefits and had increased government salaries and wages, employee pensions, insurance and employer contributions to government insurance as shown in the budget for 2011 (chart 1) Government spending is apportioned to defense, health, pensions, welfare and other government units’ expenses. Government also spends more on imports and less on exports that shows deficit in our balance of trade (Table 3) The investment scenario showed signs of improvement as according to some analysts (Ernst & Young, 2010) there are new investments in facilities and jobs in 2010. This report said that despite current crisis, there are about 4,600 business investments accounting for $189 billion of capital investment in business facilities and more than 438,000 new jobs and retained jobs have been accounted. These new investments as reported, accounts for those mobile capital investments and not tied up with geographic markets, natural resources and other constraints. The status of imports of goods and services remain to be in a weak position as deficit has been reported to increase in February 2010. Bureau of Census & Statistics reported an increase of $39.7 billion international trade deficit in February as compared from imports of $37.0 in January, showing the country’s imports has been more than exports. Jobs and unemployment. For the last 3 years, unemployment rate has gone up from 4.60% in 2007 to 9.70% in 2010.(Trading Economics) Loss of jobs are due to recession and outsourcing. Reuters said 8.4 million lost jobs are due to recession, while Nounou, E. said outsourcing results to capital flight and job losses. Nounou reported 3.3 million jobs are outsourced to India, Philippines, Jamaica and Sri Lanka, while $13 billion in wages are capital flight to these countries and has affected employment in the US. Inflation and expectations of inflation. Consumer price index is a benchmark used to measure inflation and its movement is constantly being watched. In November 2008, CPI has gone down, but it is forecast to go up by July 2010. (See Chart 3 Annex) Relative to inflation, US inflation rate in January is down to 2.63% and forecast to still go down to 2.14% in February 2010. The present inflation rate is still off-target from the expected inflation rate set by the government for the next five to six years which is 1.7% to 2.0% . (Financial Forecast Center) Another measure of inflation is the Producers Price Index that “measures the average change over time in the selling prices received by domestic producers for their output”. (BLS) The PPI for finished goods is fluctuating, as there is a 0.7 percent increase in March, a 0.6 decline in February and a 1.4 increase in January this year. There is also 0.1 percent of PPI increase in goods other than food and energy. (BLS). Fiscal policy. At the present tax level, revenues coming from taxes are not sufficient to support government spending. The government has a deficit, (Chart 4, Annex) that in 2008 as well as in other years, revenues did not match spending. Revenues did not increase for same period, and has even gone down in 2010.(Chart 5 Annex) As of April 26, 2010, US public debt hits $12.885 trillion, while US population is 308,261,783 million, meaning each citizen has a share of $41,801 of this debt. (US National Debt Clock) As of Sept. 30, 2009, White House has released official record of US deficit as $1.42 trillion which is three times higher than last year. It is predicted to come close $9.1 trillion in the next decade. (Jackson, D. 2009) At the rate of public spending and increasing budget deficits, tax levels are no longer appropriate to support government spending because budgets continue to increase. (Table 1, annex) Interest Rates and Inflation. The interest rate in the past six months is between zero to. 25%. (Bloomberg). It has remained to be low because of the Federal Reserve Bank’s policy to lower interest rates in order to increase money supply and affect an expansionary policy. It is most likely to remain at the low level because the economy has not yet improved. It cannot go down further, or contract more, because financial institutions cannot operate at zero level. The change of interest is 0.75 percent as six months ago, interest rate was .12 as compared to current rate which is .21 (See Table 2) FED policy of keeping low interest rate is a correct one as it creates a cycle wherein businesses are encouraged to move because of low capital costs, manufacturers and production are supported that in turns gives full employment. At full employment, income and spending are improved that will eventually boost the economy. So at this point, the best option is to leave the policy unchanged, neither to expand nor to contract Exchange rate. The exchange rate plays an important role in international trade. If we need to buy products from other country we need to buy that nation’s currency from the foreign exchange market. In international trade the value of currency affects exports and imports. For instance, if the US dollar is strong as compared to other currencies, we can buy more imports from other countries as it becomes cheaper and at the same time they can offer these goods to customers at lower prices. This increases demand for products and increases profits. On the other hand, strong dollar is disadvantageous for exporters, as buyers from other countries find the dollar to be expensive and product costs higher, then exports fall. The resulting theory here is when dollar is strong, imports increase while exports fall, and vice versa when it is weak. (Mofatt, M.) For example, the exchange rate of EUR 1= USD 1.311 as of April 23, 2010. The average change of this currency from April 23, 2009 to April 2010 is 1.4155 showing weakness of the USD (European Central Bank) Conclusion There are strong indications based on the data gathered that the signs of continued recession are still present and most likely to continue within the next six months. Recovery will be slow because unemployment rate is expected to further increase and that there are no indications of employment normalcy. Consumer spending will still be slow as there is only 1% growth rate apportioned by consumer to spending and savings, and is not enough to drive the economy to its former level. Government spending will most likely be curtailed by debts and budget deficits and insufficient tax measures. This will affect tax collections coming from revenues created by spending. Outsourcing may be effective to the profitability of companies but will hurt US employment as there will be loss of jobs to other countries. Inflation rate has gone down but has not stayed within the healthy and acceptable rate set by the government. Interest rates has remained within the FED target, but has weakened the dollar against other strong currency. This has advantages as importers will find it rewarding. Policy Design At present, a recession gap exists in US, wherein the aggregate level of production is less than what would be produced under a full employment. This gap rises as unemployment rate continues and business condition contracts. To address this gap, a combined monetary and fiscal policy needs to be designed. Fiscal policy are decisions to be done by the President and Congress that will effect consumer and government spending with the aim of attaining full employment, price stability and economic growth thru laws. Thru tax laws, the government can influence the amount of disposable income available to consumers. Policy designs appropriate are: 1. Increase tax laws – When tax laws are increased, consumer spending is lessened, but will give revenues to government. New taxes will provide revenues to support government spending that will provide employment, increase consumer disposable income and fill in the recessionary gap. 2. Monetary policy. The present FED monetary policy is to increase money supply thru lowering of discount rate, lowering of bank’s reserve requirement and purchasing of securities in the open market. At this point, it is not necessary to change this policy as changing this to contractionary one would be disadvantageous to the economy. The FED’s low interest rate encourages higher rate of investment because cost of capital financing is less. In the same way, the present low bank reserve requirement allows bank to have an increase in the amount of money they can invest. Money supply is also created when FED sells US securities in the open market. Table 1. United States Budget, 2008-2011 Year Budget Revenue Deficit Debt 2008 $2.90 trillion 2.7 trillion 239 bn 9.985 trn 2009 $3.10 trillion 2.7 trillion 407 bn 12.067 trn 2010 $3.55 trillion 2.3 trillion 1.171 trn 14.078 trn 2011 $3.83 trillion No data No data No data Source: Bureau of Labor & Statistics Chart 1. Pattern of government spending Chart 2. US unemployment rate Source: Trading Economics Chart.3 CPI Index. Table 2. FED Interest Rate Source: Financial Forecast Center Chart 5. Government Spending FY 1903 to FY 2010 Chart 4. Growing US Deficit Source : US Government Spending.com Works Cited Bloomberg.com Market Data. 15 April 2010 (BEA) Bureau of Economic Analysis. Personal income and outlays. February 2010. News release, 15 April 2010. http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm (BLS) Bureau of Labor & Statistics Producer. Producer Price Index, April 22, 2010 http://www.bls.gov/pPI/ Ernst & Young. Ernst & Young LLPs 2010 US Investment Monitor Shows Investment in New Facilities and Jobs Despite Uncertain Business Climate, 02 May 2010(http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=PR&date=20100422&id=11440927) European Central Bank. 2010. Exchange rate. 03 April 2010 Jackson D, 2009 , Obama team makes it official. Budget deficit hits record: By a lot The Oval :Tracking Obama Presidency, 15 April 2010 Mofat, What Effects does Monetary Policy Have? 13 April 2010 ://economics.about.com/cs/money/a/policy_2.htm Nounou, E 2003. E-Journal: The Impact of Outsourcing on the American Worker 15 April 2010 The Financial Forecast Center. Consumer Price Index Forecast. 13 April 2010 > Reuters.com. Jobless rate hits 5 month low but payrolls fall. 03 March 2010 Trading Economics. United States Unemployment Rate. 2010. Global Economic Research. 03 March 2010 http://www.tradingeconomics Trading Economics.Bloomberg United States Balance of Trade” 2010 . 02 March 2010 Read More