Revival of the Economic Growth in the United States - Research Paper Example

Economic Growth in United States Abstract U.S. economy is believed to be one of the strongest economies in the world. The strength of the economy is often reflected in the living standards of the people. People staying in United Sates are experiencing probably the most advanced living standards in the world. Industrial revolutions happened in United States in the twentieth century gave momentum to the economic growth of the country. United States is following a capitalist economy which has its merits and demerits. The recent global financial crisis has severely affected the economic growth of United Sates and many big organizations collapsed in United States. But such negative impacts were short living and the U.S. economy already started showing the signs of a revival. This paper briefly analyses economic growth United States Introduction Friedman, (2006) has argued that economic growth has become the secular religion of advancing industrial societies. In his opinion, economic growth means raising standard of living for the majority of the citizen (Friedman, 2006 p.3-4). America is one of the best examples which educate others that how one nation can develop strongly with the smart utilization of available resources. Even though America gone through several wrong periods, like the world wars, war on terror and the recession problems, still American economy is one of the strongest economies in the world which is evident in the living standards of the people. Historical background of American economic growth Gordon (2009) has pointed out that the World Wars created changes in American life as majority of the men were assigned military duties in overseas countries at the time of war and the women forced to work in industries which were vital for the war efforts. The increased demand for women workers during the post war period resulted in women entering and re-entering in the labour force in greater numbers (Gordon, 2009, p.2). In other words, world wars served as a blessing for the American economy as America was able to produce some expert workers form the women community. Earlier most of the American women confined to their duties at home or land and was reluctant in working in industrial units. But the world wars forced them to come out from their homes to help their husbands working in the war fronts and also to support their families. Thus the working culture in America has changed drastically and even after the world wars the women community continued their work at industrial units which helped America to utilize the manpower more effectively for the industrial growth. Technological advances forced the farmers to concentrate more on the more productive manufacturing sector in 1950’s and 60’s. As a result the number of people working in the farming sector which was around 7.9 million in 1947 declined to 3.4 million in 1998. Moreover the rate of growth of the American suburban families outpaced the urban families by a ratio of five to one (Gordon, 2009, p.4). America was one country which is indebted their economic growth to the technological advancements. Most of the critical inventions were happened in America which helped them to implement such inventions in the practical sector and to reap the benefits more quickly than anybody else. For example, consider the case of Microsoft. Microsoft was able to develop an operating system Windows which captured the computer industry all over the world. No other substitute products were able to compete effectively with Windows because of the absolute monopoly it enjoys in the operating system market. The following chart represents the home ownerships in America which is an indicator of economic growth from 1940 to 2000 statistics. US home ownership rates Year % 1940 43.6 1950 55 1960 61.9 1970 62.9 1980 64.4 1990 64.2 2000 66.2 (Gordon, 2009, p.3) It is evident from the above chart that the home ownerships have increased substantially in the sixty years period from 1940 to 2000. As per the 2000 statistics 66.2 of the American population have their own houses. It is fact that the population was also increasing during the same period and even then America was able to maintain a steady growth in the home ownership statistics. Many countries with highly developed economies, including America have experienced alternative eras of economic growth and stagnation (Friedman, 2006, p.5). It is impossible for a country to sustain its economic growth always because of the different internal and external economical, political and environmental factors. The global economy is interrelated now because of globalization and any changes happen at one corner of the world can affect the other corners as well. America’s economy is made up of a diverse mix of local economies. Thus the economy of America is, to a great extent, a composite of the effects of all the decisions made in American cities and towns about the future growth of their own economies (Gordon, 2009, p.1). Unlike many other countries, American economic growth is heavily dependable to the local economic growths. Different states with diverse economic capabilities constitute the whole American economy. In other words, if some states develop rapidly and other states develop slowly, American economic growth will be the combined effect of the economic growth in the individual states. American economy in the recent past American economy was the fastest developing economies in the world before the 2008 recession started. Even though the unfavorable incidents like the 9/11 world trade center attack, the war on terror in Iraq and Afghanistan have slightly affected the economic growth of America, the major problem came in the form of recession in 2008 which severely damaged the economic growth. Rea Hederman, Jr. and Tim Kane, Ph.D (2004) have argued that even though some of the polices adopted by the Bush administration in the beginning of the twenty first century affected the economic growth slightly, no severe damage has been done by such policies. Since 1970, GDP growth has averaged 3.16 percent per year, after inflation. During President Bush's first year in office in 2001, the economy slipped into and pulled out of a recession and yet overall output managed to grow slightly. Since 2001, real output has grown at an average annual rate of 3.47 percent. This rapid expansion has been concentrated in the five quarters following the 2003 Bush tax cuts. Since the third quarter of 2003, growth has averaged 4.62 percent (Hederman, Jr. and Kane, 2004) According to the statistics available to the World Bank, the United States Gross Domestic Product is worth 14204 billion dollars or 22.91% of the world economy, and moreover the economy of the United States is the largest in the world (United States GDP Growth Rate, 2009). United States follows the principles of capitalist or market oriented economy in which the private individuals and business firms make most of the decisions. Even the government of America buys goods from the private market place because of the immense monopoly or upper hand private business group over the market. America encouraged private participation in most of the vital areas of economy which brought both advantages and disadvantages to the economic growth. The major advantage of market oriented economy in America was that it encouraged people to do businesses. Government of America has given every possible assistance to the business people and starting a business in America made easy. Financial institutions were more than ready to help the business people and they arranged loans to the business people without even properly assessing their financial abilities. Private people exploited all these opportunities and when the global financial crisis started to its entry into the financial market, American economy was the one most seriously affected and collapsed. The following chart shows American economy before during and after the recession started. (United States GDP Growth Rate, 2009) From the above chart, it is evident that the American economy started to decline during the alter part of 2007 and faced serious troubles in 2008 and 2009. The 2010 statistics shows that it is on the verge of recovery at present. Still America needs a substantial period of time to repair the damages caused by the economic crisis. Classical and Keynesian economist’s views with respect to the current American financial crisis According to classical economic theory, free markets can regulate themselves if left alone, free of any human intervention (Patil, 2010). This theory believes that the market has the capacity to stabilise after fluctuations. Classical economists believe that American government should stay away from the market even though it is facing crisis at present. On the other hand, Keynesian economists believe that there is no divine entity, nor some invisible hand, that can help the American s to over economic difficulties. It stresses on the fact that Government intervention is absolutely necessary to ensure growth and economic stability (Patil, 2010). In short, both classical economists and the Keynesian Economists have different views about the market mechanisms, market functioning and solutions for the current economic problems in America. It is a fact that neither the classical economists nor the Keynesian economists were able to foresee the economic crisis. It is difficult to accept the arguments of the classical economist in the present American financial crisis scenario. The arguments of the Keynesian economists were seems to be right as we cannot imagine, what was going to happen in case the government was stayed away from the market when the current crisis has started. Most of the governments entered the market and made lot of changes in their policies and the functioning of the market when the crisis started to affect their economy. In America, the government has declared a stimulus package worth billions of dollars to save the economy from total destruction. The declared American stimulus package was worth around $ 825 billion in total; Tax Cuts - $275 Billion: Aid to States - $119 Billion: Education - $117 Billion: Infrastructure - $90 Billion: Aid to Those Hit Hardest - $106 Billion: Energy - $54 Billion: Science - $16 Billion: and Other - $48 Billion (Zacks Investment Research, 2009). It is eveident from the above statistics that the government forced to aid the key areas of American economy to come out from the crisis. Even then many people in America lost their jobs and many others faced their salaries cut down. American public started to cut down their expenses and according to some news paper reports, people started to use line buses more frequently in order to cut down their travelling expenses. In other words, the living standards of the American public have come down a lot because of the recent recession. Unemployment has reached all time high now in America. If was suicidal for America if they rely on the views of classical economists to overcome the current problems. Another important area in which classical eco0nomists and Keynesian economists differ is about the prices of commodities. Classical economists believe that the prices should be flexible according to the market conditions. In other words the prices should fluctuate based on the supply and demands of the goods in the market. But we have seen that the prices went in one direction only even thought the economy was destroyed in America. Prices of land and labour have not come down in America when the recession captured the market. Instead of swinging the prices from one end to the other end prices goes upward only. Keynesian Economists are of the opinion that instead of fluctuation, the prices should stay stable as much as possible. In their opinion, too much fluctuation in prices is not desirable to the business people and the market. In the current economic crisis scenario if the prices fluctuate, it is difficult for the consumers to plan their family expenses correctly. Classical economists believe that if a good is produced, it has to be bought. On the other hand, Keynesian economists argue that effective demand controls the supply (Patil, 2010). The recent economic crisis has seriously affected the demand in the real estate sector. The crisis forced the people to stay away from purchasing houses and flats. Most of the market activities are demand driven and in the absence of demand the construction people forced to cut down their construction activities. It is rubbish to believe that even in the recession times, people will purchase houses if it is constructed. The classical economists believe that the people will save money if the interest rates are higher whereas the Keynesian Economists believe that savings depends on the expected profitability (Patil, 2010). Americans are believed to be the lavish spenders of money. They are not much bothered about tomorrow. Whatever they are getting today is spent today itself. Such lavish spending habits created many problems when the recession came at a quiet unexpected time. The need for savings is clearer to the public at present. They have seen that the Indians and the Chinese escaped from the recession without many damages because of their difference in life philosophy and spending habits. Indians always save something for the future and when the recession comes, they were well prepared for it. Classical economists are of the view that the wages will increases as the prices of the commodity increases and hence the price hikes may not affect the people’s life standards. Keynesian economists argue exactly opposite to the above theory. In their opinion, real wage decreases when the prices increase (Classical economics, n. d). There are always complaints from all quarters that the salaries are not enough to meet the present family expenses. Even though the companies are increasing the salaries time to time, it is not sufficient enough to meet the increasing family expenses because of the skyrocketing prices of the essential commodities. The prices of rent, food, water, electricity, telephone, clothing etc are not manageable with the present salary structure of an ordinary employee in America. In short, Classical economics have no clue at all about what is exactly happening in the American market. Their views and theories have lost its credentials because of the rapidly changing market and economic conditions in America. Keynesian economics seems to be a better option for the revival of American economy. Conclusions The industrial revolution happened in America in the twentieth century made it one of the stable economies in the world. It is still believed to be the strongest economy in the world even though some problems like the present economic crisis, war on terror, world wars etc adversely affected it. The period between 2008 and 2010 were the most difficult period for the American economy in the recent times and at the beginning of the 2010, American economy shows sign of a recovery or revival. Keynesian economic principles seem to be a better option for the revival of American economy compared to the classical economic theories. References 1. Classical economics, (n. d), Retrieved on 14 May 2010 from http://www.theshortrun.com/classroom/doctrines/classicals.html 2. Friedman Benjamin M. (2006), The Moral Consequences of Economic Growth, Publisher: Vintage (September 12, 2006) 3. Gordon Gerald L. (2009) The Formula for Economic Growth on Main Street America Publisher: CRC Press; 1 edition (July 29, 2009) 4. Hederman Rea, Jr. and Kane Tim Ph.D (2004), Past. Present! Future? Economic Growth in America, Retrieved on 14 May 2010 from http://www.heritage.org/Research/Reports/2004/10/Past-Present-Future-Economic-Growth-in-America 5. Patil Sayali Bedekar , (2010)Classical Economics vs Keynesian Economics, Retrieved on 14 May 2010 from http://www.buzzle.com/articles/classical-economics-vs-keynesian-economics.html 6. United States GDP Growth Rate, (2009), Retrieved on 14 May 2010 from http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=USD 7. Zacks Investment Research, (2009), America's New Stimulus Package, Retrieved on 14 May 2010 from http://www.istockanalyst.com/article/viewarticle/articleid/2964166 Read More