Impact of the Crisis on the Economic Performance - Term Paper Example

Political, Legal and Social Aspects Introduction The 20th century started quite well for the economy of the United s. The country emerged as theworld’s new super power after two world wars that totally destroyed economies all across the world. At one point the economy of the US constituted almost half of the Gross World Product. The US economy blossomed further after the fall of the communist Soviet Republic. The 90s were good years for the US economy when there was a boom in many sectors including the housing, manufacturing and industrial sectors (Moseley, 2009). This economic boom was not to last forever. The economic crisis that swept across the globe also affected the United States in a big way. As early as 2000, the US had already started experiencing a financial crisis that no one really took as seriously as was expected. The economic crisis has affected many aspects of the US economy. Although the worst part of the crisis seems to be over, there is no denying the impact it had on the whole of the US economy (Wolf, 2009). Companies have been forced to close down while thousands of people have lost their jobs and found themselves in bankrupt situations. Inflation has shot up and the national debt has risen to unprecedented levels (Moseley, 2009). This paper looks at the impact of the economic crisis on the economy of the US and the government’s budget situation. Impact of the Economic Crisis on the Economic Performance of the United States Housing The housing industry was probably the worst hit by this financial melt down. House prices dropped to unprecedented lows during the economic downturn. This had a profound impact on the GDP growth in the country. The slow economic growth has further resulted to high unemployment levels never seen before. Construction activities have slowed down considerably and there are thousands of unsold homes all across the country. The drop in home prices has affected the personal wealth of a lot of people. Most home owners rely on their homes as the sole source of income. The equity for these homes also serves as the collateral that many people use to get home loans or any other loans. This means that since the value of homes has declined, most people do not have the capability to borrow loans when they need to. This has led to a reduction in consumer spending level, which has in itself slowed down the economic pace. The falling home prices also precipitated a crisis in the financial markets and a disastrous credit crunch. The foreclosure filings are increasing each single day and the situation does not seem to be getting any better. More people are filing for foreclosure since they can no longer afford their mortgages. Yet these homes that have been foreclosed do not have a ready market. Most banks are reluctant to give mortgage loans and those that do give do so under stringent conditions (Wolf, 2009). This has made it very hard for many people to own homes. This means that they have to look for rental property, which only adds to their bill burden. Healthcare The healthcare sector is another department of the US government that was badly hit by the economic downturn. There are more people who cannot afford basic healthcare because they do not have jobs that will help them get the money to pay for medical insurance. Insurance companies have on the other hand tightened their policies such that only few people can access quality insurance services. Employment Since 2000, a total of 3.2 million jobs have disappeared, leading to an unemployment level of 9.9%. Many companies have closed their doors to people seeking employment. Others have resulted to large scale lay offs in a bid to save on their costs (Bureau of Labour Statistics, 2010). Although many of the people who have lost their jobs have turned to different forms of self employment, there remains a large number who are not employed. Financial Markets Many people had fared that the financial markets would greatly suffer from the economic downturn. Although the situation was not as bad as had been feared earlier, the stock exchange did feel the pinch of the dire economic situation that hit it from 2007 to 2008. The crisis in the housing sector is mostly to blame for the crisis in the financial markets. Most traders relied on their mortgage loans which have been jeopardized by the ongoing financial crisis. Many bond insurers have been cut from business due to high debt levels and unwilling lenders. The owners of stocks in the US markets lost an estimated $ 8 trillion. The value of their holdings dropped from $20 trillion to $12 trillion (Reuters, 2010). Inflation One of the indicators of an economy in trouble in the United States is inflation. Ever since the financial crisis started, the prices of basic commodities such as food and energy have been on the rise. As inflation continues to increase, so does the financial situation of individuals continue to deteriorate. They have to pay higher bills and yet their wages are not increasing. What follows is a slowed down economy which hurts the GDP. There effects include the collapse of several manufacturing industries which has further compounded the ever present problem of unemployment. Due to the tough financial times, many industries found themselves at loggerheads with their financiers due to high amounts of debts. Many companies that had been experiencing huge profits before are now facing serious financial problems. Some banks have also been forced to close business due to high inflation and debt situations (Kubarych, 2002). Budgetary Situation of the US Government There is a lot of widespread pessimism relating to the economic situation in the US. Many Americans do not think that the economy can bounce back to how it used to be in the 90s or even before that. This recession has hit people as hard as, or worse than the great depression did. The budgetary situation in the country does not seem to give hope to Americans since it only puts the country deeper in public debts (Reuters, 2010). The president’s budget for the year 2010 amounts to $3.55 trillion. For social security the budget has increased its estimates to $695 billion. This is a 4.9% increase from the previous year’s budget allocation to the department. Another $453 billion and $290 billion have been suggested as the mandatory spending for Medicare and Medicaid respectively (Wolf, 2009). The spending for the department of defence is set to increase by 12.7% if it will receive the suggested $663.7 billion. The department of housing will also receive a boost through a $47.5 billion budget allocation this year. Other departments to receive notable increases in their allocation include the National Infrastructure Bank which will get $ 5 billion and social security administration which is going to get $9.7 billion (Wolf, 2009). The debt level of the US is at an all time high of $12,1 trillion. This is approximately 83% of GDP. Many people think that the current budget and the stimulus plans being fronted by the government will only make the debt situation worse. Many critics have said that the overzealous spending by the government may bring only a short term solution to the financial woes of the country (Whitney, 2009). The budget is focused on the development of the individual federal states. Every district in every state has been recognized in the proposed budget for the year 2010. The budget deficit for this year is expected to drop from $1.42 for 2009 to 1,17%. By the year 2013, the deficit is expected to decrease to $533 billion (Whitney, 2009 and wolf, 2009). If the budget is implemented with high level efficiency, there is a high likelihood that the country will get back to its feet sooner rather than later. The 2010 budget proposal has prioritized clean energy, health care, infrastructure and education. The budget will also see the tax cuts for the wealthiest being increased. The healthcare department faces a $132 deficit which may reduce after the implementation of the Senate Healthcare reform bill that was signed in March 2010 (Kubarych, 2002). Conclusion The direction that the US economy will take is not so certain at the moment. However, whichever direction that the economy is going to take will determine the kind of government policies and decisions will prevail. Although the United States remains the world’s economic leader, there is a possibility that this will not be the case a few years from now. The rising national debt could have untold effects on the US economy as a whole. The unemployment levels are still very high and the housing sector is yet to find its footing. However, despite all these gloomy facts, there seems to be some light at the end of the tunnel. The worst of the recession seems to be over and all that the country needs to get back to normalcy are good policies (Whitney, 2009). The Obama government has already set out policies that are meant to revamp the ailing economy. Although there is no quick fix to the problem, it is a good thing that the government is committed to right the wrongs that led to the disaster in the first place. The administration has already begun implementing an $825 billion stimulus plan which is targeting long term deficits in the economy (Whitney, 2009 and wolf, 2009). Additional stimulus plans will focus on job initiatives (Bureau of Labour Statistics, 2010) and other areas that have been adversely affected by the economic downturn. Fifty eight billion USD from the stimulus plan is planned to boost the energy sector. The money will be used to fund an electricity grid, weatherize some of the modest income homes around the country and tax cuts for research in renewable energy. Education will get a total of $141.6 billion from the stimulus plan. This will be spread out across all the districts in all the states. Some of the funds will be used to pre vent unnecessary ay offs in the education sector (Whitney, 2009). Infrastructure will get $90 billion. The money will go towards the maintenance of public infrastructure and improve water projects. New infrastructure projects will help in the creation of thousands of jobs. Also included as part of the stimulus plan is a $102 billion allocation which will be used as financial aid to the unemployed and poor. This could be a reprieve to the more than 500,000 unemployed Americans, but it will only help in the short term (Kubarych, 2002). The US Federal Reserve has already taken the necessary steps to increase money supply which will prevent low wages and high unemployment from going to a point of a drop in global consumption (Bureau of Labour Statistics, 2010). This plan, together with the ambitious stimulus plan undertaken by the government might help the economy of the United States start back on the upward trend. Although the country continues to be an economic leader in the whole world, it is in a very shaky situation right now. Good economic policies will greatly help the country but there is need to come up with counter measures to the economic problems on the grass roots level (Whitney, 2009). There were times during the recession when people had fears that the dollar was going to be obsolete in the near future. These fears were not unfounded but since the inflation rate has somehow subsided there is still some room for improvement. References Bureau of Labour Statistics. (2010). Employment Situation Summary. Accessed June, 25: http://www.bls.gov/news.release/empsit.nr0.htm Kubarych,R.M (2002). US Economic Situation. Council on Foreign Relations. Accessed June 25, 2010: http://www.cfr.org/publication/5165/us_economic_situation.html?breadcrumb=%2Fpublication%2Fpublication_list%3Ftype%3Djournal_article%26page%3D48 Moseley, F. (2009). The US Economic Crisis: Causes and Solutions. Accessed June 25, 2010: http://www.isreview.org/issues/64/feat-moseley.shtml President’s Speech. (2008). The US Economic Situation and the Challenges for Monetary Policy. Accessed June 25, 2010: http://www.whitehouse.gov/omb/rewrite/budget/fy2008/budget.html Reuters. (2010). Obama’s 2010 Budget: deficit soars amid job spending. Accessed June 25, 2010: http://www.reuters.com/article/idUSTRE60U00220100201 Whitney, M. (2009). U.S Economic Forecast 2010, The Year of Severe Economic Contraction. The Market Oracle. Accessed June 25, 2010: http://www.marketoracle.co.uk/Article15784.html Wolf, R. (2009). Obama’s $825B Stimulus Plan. USA Today. Accessed June 25, 2010: http://www.usatoday.com/money/economy/2009-01-15-obama-stimulus-plan_N.htm Read More