Current Microeconomics Events in the United States - Case Study Example

Running head: CURRENT MICROECONOMIC EVENTS IN THE UNITED S Current Microeconomics Events in the United sIntroduction This paper examines the current microeconomic events in the United States, which has experienced an economic slowdown in recent years, resulting in reduced consumer spending. This pattern has also created a negative impact on investments and borrowings in the country. In applying the concepts of microeconomics, it is noticed that there is inelastic demand for money because the reduction in fund rates has not led to the desired results. In order to have a meaningful idea about what is happening to the US economy from the microeconomic perception; it is required to analyze the current microeconomic events in the country. Microeconomic events primarily relate with the patterns of decision making by individual consumers and firms and organizations, in terms of the manner in which products and services are to be consumed or produced. It is known that microeconomic decisions taken by individuals and organizations are influenced by considerations of cost and benefit. Costs relate to financial cost pertaining to cost of finance, such as total variable cost, opportunity cost and fixed cost. Issues under consideration of micro economists vary from what factors impact the savings of consumers to how much firms should produce under the given circumstances. Main Body Interest rates have always been an indicator of a country’s economic status. Increase in the interest rates indicates a number of things such as the economy’s ability to absorb high interest rates, meaning that increased interest rates imply that the central bank assumes that different entities in the country will continue borrowing at higher interest rates, meaning that productivity will increase and the economy will grow. Increasing interest rates also tend to reduce inflation. Interest rates in the US have continued to remain around zero, which indicates that the economy is facing difficulties in enhancing production. It is believed that increasing interest rates at this time will create economic complexities for the country. Consumer confidence in the US is presently very low, which is evident from the large numbers of homes that continue to remain on sale. In view of the high rate of unemployment, many people are still not ready to accept mortgages while many are unable to comply with the minimum bank requirements to qualify for mortgages (Dorning, 2011). America needs to focus more strongly on issues such as consumer prices, housing market, debt load and interest rates. The country’s debt load continues to be massive and is growing steadily, which has depressed the economic environment and minimized growth. Whatever growth that happens is offset by the increasing debt, while low interest rates prevent the economy from affecting a recovery in the short run. Low interest does increase borrowings for businesses and individuals but the default rate in the US is very high; almost twenty percent. Consumers are reluctant to buy new homes and prefer to wait and watch as they are not currently prepared to take more loans during times of uncertainty, primarily because assets have the tendency to decline in value in the short term. In servicing its own debt, the US relies heavily upon foreign money by offering its assets such as government bonds to other nations. However, America’s credibility in this regard is gradually declining in view of its increasing debt. Countries such as China have begun to question the ability of the US to repay its debts. The US appears to be losing its status of a world super power because many countries have started looking elsewhere for investing. The employment situation in the US continues to deteriorate and the numbers of good jobs are consistently decreasing. The numbers of American citizens living in poverty are also increasing. Over the last few years, millions of job opportunities, thousands of businesses, and billions of dollars of the country’s wealth have been sent to other parts of the world. The country’s current debt is almost 15 times as compared to thirty years ago, while debts held by individual consumers have increased by over 1700 percent during the last forty years. Every year the inflation rate goes up while incomes continue to remain stagnant. Such patterns have deteriorated the economic status of the middle class. It is thus evident that unless the current pattern is changed, America will not have a bright future. The long term patterns that have been harming the economy need to be reversed (Crandall and Winston, 2009). Inflation has proved to be a silent tax on citizens that has also been stealing the country’s wealth. For instance, the following pattern of increase in gasoline prices is a strong indicator of the extent to which inflation has been eating into the real incomes of people. Year Price of Gasoline January, 2009 $1.66 January, 2010 $2.68 January, 2011 $3.05 January, 2012 $3.29 It is surprising to note that during 2011, the average American family spent about $4,155 on gasoline alone. The amount paid by American citizens for clearing electricity bills has been rising and this increase is more than the rate of inflation during the last five years. The cost of healthcare continues to increase at an alarming pace, which is evident from the fact that in 1980 it accounted for only 9.6 percent of the overall consumption and is now 16.4 percent. College education has become very expensive in the US; after adjusting for inflation, college students in America are now paying double the money that they paid ten years ago. As compared to 1970, the purchasing power of Americans has declined by six times. The unemployment situation in the country is getting worse by the day because there are now lesser jobs available as compared to 2000, although almost thirty million people have added to the population since then. The US is losing millions of jobs every year because multinational companies are systematically relocating jobs to other nations. According to Paul Craig Roberts (2012), “In the first decade of the 21st century, Americans lost 5,500,000 manufacturing jobs. US employment in the manufacture of computer and electronic products fell by 40%; in the production of machinery by 30%, in motor vehicles and parts by 44%, and in the manufacture of clothing by 66%” (Roberts, 2012, p.1). The US economic structure is being badly damaged because in 2010 alone about 23 manufacturing facilities were being closed down every day. It has become legal for multinational companies to shift millions of jobs to foreign facilities where labor is cheap and tax burdens are much less. Because of such policies the trade balance is becoming more adverse. Millions of Americans continue remaining without jobs. According to Reuters, there are presently about 23.7 million people unemployed or underemployed in the US. During the last thirty years the number of low income job opportunities have increased, which is evident from the fact that presently about forty percent of the jobs in the country are categorized as low income jobs. Another aspect in this regard is that the numbers of middle class localities are on the constant decline because in 1970, almost 65% American citizens lived in middle class neighborhoods and in 2008 this ratio had declined to 45 percent (Mutikani, 2012). Ten years back the US was categorized at the top in terms of average wealth per citizen, but now the country has been categorized at seventh place (Durdan, 2010). Per-capita incomes in the US are on the decline, while consumer debt has risen to 1700 percent as compared to 1971. It is unfortunate that US citizens have not yet adopted the savings habit because the savings rate is still on the decline and consumer credit is increasing. The debt problem in the US is becoming worse every year and in 2010 crossed the total GDP of the country for the first time (Mutikani, 2012). It is thus evident that the long term microeconomic position of the economy is constantly getting worse. There are millions of people who are struggling to pay for food and mortgages. There are increasing indications of more wealth coming into the hands of the wealthy class. It is the wealthy class that is actually living the American Dream because their wealth has increased by over three times in the last thirty years, while the size of the middle class is steadily declining. At the same time, the numbers of poor in the country are growing exponentially. Theoretically, it is evident that the market failures that led to the declining US economy were characterized by the speedy development of subprime mortgage practices and the inability of investors and home buyers to recognize and evaluate the impending risks (Hess et al., 1997). It was unfortunate that US banks and rating establishments did not properly estimate the chances of the quick fall in home prices. They were overconfident in measuring the inter-relatedness relative to credit risks. Financial institutions, government agencies and consumers were unable to foresee the probability of events that actually resulted in the failure of financial institutions, eventually leading to the immense economic pain that most Americans are suffering from. It is now imperative to call for new and better financial market regulation that introduces new models that do away with the possibilities of speculative bubbles. The attempts by the Federal government to bail out operations have not succeeded and what is now required is to ease monetary policy through the Term Asset-Backed Securities Lending Facility and Troubled Asset Relief Program. Companies and consumers have now learnt that the market failures occurred because of imperfect information resulting from the existing microeconomic policy. The government did not initiate any emergency action in addressing the problems associated with the housing markets. Meaningful action has to be taken to discourage non creditworthy borrowers from assuming huge mortgages. It is expected by economists that the housing market will improve only if the price level falls substantially and excessive supplies are managed better. Conclusion Financial institutions need to write off the debts issued by them on excessively over valued houses. Not much evidence has come forth in the context of stabilization of credit markets while deregulation of sectors such as communications, energy and transport is considered a mistake. It is evident that financial markets are very sensitive to the risks of credit default, which means that financial risks need to be managed more effectively through appropriate financial theories. Consumer confidence in America is presently very low, which is evident from the large numbers of homes that continue to remain on sale. In view of the high rate of unemployment, many people are still not ready to accept mortgages while many are unable to meet with the minimum bank requirements to qualify for mortgages. The country needs to focus more strongly on issues such as consumer prices, housing market, debt load and interest rates. The country’s debt load continues to be massive and is growing steadily, which has depressed the economic environment and considerably reduced growth. The little growth that is happening is equalized by the increasing debt, while low interest rate prevents the economy from recovering in the short term. List of References Crandall, Robert W., and Clifford Winston (2009). What About Microeconomics? Forbes.com Dorning, Mike. (2011). Obama Seeks Jobs Plan as U.S. Workingman Status Further Erodes, Bloomberg. Durdan, Tyler. (2010). US Drops From First to Seventh In Average Wealth Per Adult, Behind Singapore, Sweden, And... France, http://www.zerohedge.com/article/us-drops-first-seventh-average-wealth, Accessed on 07 February, 2012. Hess, Peter, and Clark G. Ross. Economic Development, Theories, Evidence, and Policies, HBJ College and School Div., 1997. Mutikani, Lucia. (2012). Unemployment near three-year low, http://www.reuters.com/article/2012/01/06/us-usa-economy, Accessed on 07 February, 2012. Roberts, Paul Craig. (2012). The Dismal Economic Outlook For the New Year, http://www.informationclearinghouse.info/article30168.htm Read More