Various Economic Theories and Models - Literature review Example

Article Analysis Report (Macroeconomics) Table of Contents Table of Contents 2 Introduction 3 Reviewing the Articles 3 A Theoretical Analysis of the Issue 5 Conclusion 9 References 10 Introduction Today, even the leading and certainly the most praised economies are witnessing various economic challenges which in turn tend to create a significant impact on its global presence. For instance, the current economic situations faced by the US economy depicts greater challenges for the nation in the upcoming years and therefore has been considered as a vital matter for study by various experts. Although economic hazards are no exceptions in todays scenario, analyzing and anticipating the future challenges have emerged as quite crucial in order to ensure higher degree of economic stability and growth. It is in this context that the current economic challenges faced by the US needs to be effectively analyzed to anticipate its future probable economic issues and therefore assist in the development of fruitful strategies. As stated by Denham (2012), being the largest economy of the world, US have to face various challenges in its national environment as well as in the international platform. A few of its most apparent challenges can be identified in terms of increasing funds allocated to the US public sector, comparatively lower tax rates in comparison to other world economies, and EU debt crisis (Denham, 2012). Based on this particular concern, the discussion henceforth will intend to address the current economic challenges of the US economy along with emphasize upon the consequent future economic issues taking into account the article written by Simon Denham and titled as “Fiscal challenges ahead for the US economy”. Using the various economic theories and models, this discussion will further elaborate towards analyzing economic challenges being witnessed by the US and therefore offering precise conclusion on the issue. Reviewing the Articles The world economic situation is apparently under deep scrutiny owing to its frequent fluctuations and rapid alterations which has left multiple countries, irrespective of their global presence as a developing or a developed economy, unstable. It is in this context that fluctuations in the global economic environment also lead to fluctuations in the national contexts of various economies including the US, one of the leading and large economies. Owing to the current economic conditions of the US, Denham (2012) pointed that a larger proportion of funds have been allocated to the public sector of the economy which has left private sector with average funds that might prove insufficient in the future due to international competitions and altering demographic features. Denham (2012) also noted that as the economy intends to massively increase its tax rates, US is likely to witness the challenge of ‘fiscal cliff’ in the near future. In the international context, EU being a large contributor to the global Gross Domestic Product (GDP) and therefore operate partially as a world economic power house, may also impose an inevitable impact upon the economic stability of the US owing to the currently witnessed Euro Zone debt crisis. Additionally, poor oil market and export-import industrial performances, US is also quite likely to face the issue of fiscal deficit in the preceding years (Denham, 2012). In the words of Denham (201), “it seems the fiscal cliff saga is the main focus topic and the rest has little influence”. However, as stated by Denham (2012), ‘fiscal cliff’ is not the only economic challenge that attracts attention with concern to the US economic stability from the global sphere. Furthermore, as stated by Moore (2012), such measures can again lead to a double-dip crisis situation. Indeed, the issues noted by Denham (2012) are noteworthy to ensure economic stability in the US from a future perspective. Nevertheless, agreeing with the issues noted by Denham (2012), Newman (2012) stated that apart from the alleged ‘fiscal cliff’, the US economy is also witnessing many other concerns currently such as the issue related with the federal budget cuts and tax policies. It is worth mentioning in this context that the US government has decided to implement strategies to offer tax hikes and spending cuts of around $600 billion. Additionally, owing to the proportionately greater amount of funds allocated to the public sector, businessmen are observed to lose their confidence on the Washington government, which in turn can have a significant impact on the trade relationships and stock exchange market performances of the nation. This situation can further lead to recessionary effects within the US economy (Newman, 2012). Apart from the aforementioned challenges, Schlossberg (2012) seeks attention towards the natural disasters that faced by the US economy which also affects the stability and growth of the nation by a large extent. Furthermore, Schlossberg (2012) also noted the existence of a liquidity trap within the current economic environment of the US. The current scenario of the US economy exhibits lenders and borrowers as reluctant to facilitate cash transfer which in the future period is quite likely to create liquidity trap within the economic structure (Schlossberg, 2012). However, the discussions presented through the article by Weisman & Baker (2012) depicts that the alleged fiscal cliff to be the sole concern of the US government in the current day scenario. Contextually, the US government has been observed arguing upon the efficiency and the consequences of implementing tax increment policies as well as budget cuts which are quite likely to create a strong influence upon the middle-class families within the nation (Weisman & Baker, 2012). These particular issues of tax rises and budget cuts have also been considered as a major economic issue by various politicians of the US, such as the current Treasury Secretary, Mr. Timothy Geithner. However, when compared to the economic challenges faced by other nations, US can be observed to play at a safer and comparatively stable position (Younglai & Nomiyama, 2012). Nevertheless, a comparison based analysis of the economic stability of the US, might not be considered as adequate enough to affirm that the nation is at a sustainable position. It is quite certain that one particular economic challenge gives rise to another and is also led by multiple influencing factors which makes it a complex phenomenon. The biggest threat currently being witnessed by the US economy is the rise of a ‘fiscal cliff’ which can, on one hand, be accounted as a consequence of multiple economic hazards and likewise, on the other hand, be examined as a causing factor of various economic challenges such as the alleged liquidity trap. Apparently, the recent stock market performances of the US depict the reluctant behavior of lenders and borrowers which can cause liquidity trap in the long run (Rushe, 2012). Therefore, based on the above review, it can be affirmed that the threats documented by Denham (2012) in relation to the economic stability concerns of the US are quite noteworthy. A Theoretical Analysis of the Issue After reviewing the articles based on the current and future economic risks in the US, two fundamental threats can be apparently identified. One being the probable risk of liquidity trap and the chances of double-dip recession owing to the measures taken in relation to fiscal cliff through fiscal policies, and the other being the negative influence of EU debt crisis on the international trade affairs of the nation. From a theoretical perspective, liquidity trap is defined as the situational condition when ‘short-term nominal interest rates’ are recorded as zero. For example, in situations of liquidity trap, lenders are assumed to lend at zero interests to the borrowers with the sole intention of encouraging the borrowers to borrow at greater quantity. As can be observed in relation to the Keynesian theory, an economy can regulate its money supply taking into account the nominal interest rates which in turn affects the prices and the output of the nation on the whole. One particular cause for an economy facing a liquidity trap situation is the sudden change in the borrowers’ behavior as well as that of the lenders’ to hold back cash, expecting a serious fiscal threat in the preceding periods. Hence, it is during such conditions that the demand for money supply becomes perfectly elastic (Rhodes, 2011). Figure 1: Liquidity Trap Conditions Analyzing the interest rate alterations of the US economy, the situation of liquidity trap becomes apparent. For instance, since 2002 to 2012, the US interest rate trend has been downward sloppy which currently accounts for nearly zero, being recorded as 0.25 percent in the current year (Trading Economics, 2012). To present it graphically, Figure 2: United States Interest Rate (Trading Economics, 2012) In relation to the issue, the US government affirmed that the strategy to reduce short-term interest rates nearly to the level of zero along with the reduction of long-term interest rates is actually a measure to recover the economy from the recessionary consequences led by the economic crisis of 2008-2009. The sole intention to allow cash transfers at such low interest rates has been to encourage and thereby facilitate the living standards of the nation, rendering stability to its socio-economic environment (Board of the Governors of the Federal Reserve System, 2012). Even though the causes to implement such a monetary policy might seem to be positive from a short-run perspective, in the long-run phenomenon it is certainly to lead towards a liquidity trap situation (Wessel, 2012). Apart from the issue of liquidity trap, the US economy is also examined to witness another challenge in terms of ‘fiscal cliff’. A fiscal cliff is referred to the decision adopted by the US government to momentously increase the tax rates and also take measures for subsequent budget cuts which are due in the current fiscal year of 2012-2013. It is worth mentioning in this context that the economy plans to impose a substantial hike in its tax charges contradicting its past practices where the US had been basically focused upon implementing lower tax charges in comparison to other developed nations. Accumulatively, tax rises and budget cuts are likely to decrease the recorded budget deficit by almost $503 billion in 2013 imposing significant effect on the economic stability of the US. Consequently, as the US economy is yet not confirmed to be in a stable position after the occurrence of the recent recession because of the 2007-2008 housing bubble, this planned dip in the budget allocated along with the rise in the tax rates are quite probable to lead the economy in a more fluctuating position (Masters, 2012). The most significant influencing factor of such monetary policy is the continuous fiscal deficit situation experienced by the US over the past few years. For instance, the economy had been suffering from fiscal deficits, where the aggregate national expenditure surpasses the aggregate national income, since the occurrence of the recent economic crisis (Congressional Budget Office, 2012). The fiscal deficits experienced by the US can be witnessed from the table below. Financial Year Deficits FY 2013 $901 billion FY 2012 $1,089 billion FY 2011 $1,300 billion FY 2010 $1,293 billion Table 1: Fiscal Deficits in US (US Government Spending, 2012) Consequently, such policy measures to cut budgets and increase taxes are quite probable to lead towards socio-economic unrest owing to the discontinuation of unemployment benefits and greater tax charges upon the higher income earners along with various other cut-offs. Accumulatively, such unrests are again likely to obstruct socio-economic stability and growth to a significant extent, essentially in a period when the country has not yet recovered from its recent economic trauma of recession. As affirmed by Moore (2012), such measures can even lead to a double-dip recessionary situation in the US. Conclusion With reference to the above discussion, it can be apparently witnessed that economic challenges are not exclusive to any country, irrespective of its size, demographic features, world presence and growth. US, being one of the most praised countries, is also not without economic issues which in turn tend to hamper its stability by a large extent. However, unlike the developing nations in the current day context, US witnesses major issues in its national economic environment with minimum influence from the world countries. The major disturbance within the US economic structure can be fundamentally observed to be related with its monetary policies. In its previous performances, the economy had been concentrating upon its recovery from the crisis situation which it had to witness particularly owing to its credit policies which later caused the housing bubble and thereby led to the economic recession in 2008. In order to recover from the situation by encouraging the cash transfers within the economy, US have further concentrated on lowering the short-run interest rates to the level of zero and thereby creating a liquidity trap. Additionally, with the intention to mitigate the limitations of fiscal deficits witnessed by the economy for a few years, since the recent economic crisis, the US government intends to increase tax rates along with slashing the budget which again gives rise to the economic threat of double-dip recessionary situation. Thus, it becomes quite apparent that policy measures concerning an economy’s monetary performances have vital impressions on the stability as well as growth of the nation on the whole. References Board of the Governors of the Federal Reserve System, 2012. Why Are Interest Rates Being Kept At A Low Level? Money, Interest Rates, and Monetary Policy. [Online] Available at: http://www.federalreserve.gov/faqs/money_12849.htm [Accessed December 28, 2012]. Congressional Budget Office, 2012. Economic Effects of Policies Contributing to Fiscal Tightening in 2013. CBO Files. [Online] Available at: http://www.federalreserve.gov/faqs/money_12849.htm [Accessed December 28, 2012]. Denham, S., 2012. Fiscal Challenges Ahead for the US Economy. Russell Publishing Limited. [Online] Available at: http://www.fx-mm.com/21315/trading-commentaries/morning-commentary-capital-spreads/fiscal-challenges-ahead-for-the-us-economy/ [Accessed December 28, 2012]. Masters, J., 2012. What Is the Fiscal Cliff? Council on Foreign Relations. [Online] Available at: http://www.cfr.org/economics/fiscal-cliff/p28757 [Accessed December 28, 2012]. Moore, H., 2012. Fiscal Cliff: What Happens If Congress Cant Strike A Deal? Guardian News and Media Limited. [Online] Available at: http://www.cfr.org/economics/fiscal-cliff/p28757 [Accessed December 28, 2012]. Newman, R., 2012. Obamas 4 Biggest Economic Challenges. U.S. News & World Report. [Online] Available at: http://www.nytimes.com/2012/12/07/us/politics/at-boehners-request-he-and-obama-negotiate-alone.html [Accessed December 28, 2012]. Rhodes, J. R., 2011. The Curious Case of the Liquidity Trap. National Graduate Institute for Policy Studies, No. 387, pp. 008-021. Rushe, D., 2012. US Stock Markets Fall Again As Prospect of Fiscal Cliff Deal Recedes. Guardian News and Media Limited. [Online] Available at: http://www.guardian.co.uk/world/2012/dec/24/us-stock-markets-fall-fiscal-cliff [Accessed December 28, 2012]. Schlossberg, G., 2012. Viewpoints: US Economic Challenges. BBC News. [Online] Available at: http://www.bbc.co.uk/news/business-20158275 [Accessed December 28, 2012]. Trading Economics, 2012. United States Interest Rate. U.S. to Keep Buying Bonds, Rates Unchanged. [Online] Available at: http://www.tradingeconomics.com/united-states/interest-rate [Accessed December 28, 2012]. US Government Spending, 2012. What is the Deficit? Federal Deficit Chart. [Online] Available at: http://www.nytimes.com/2012/12/07/us/politics/at-boehners-request-he-and-obama-negotiate-alone.html [Accessed December 28, 2012]. Weisman, J. & Baker, P., 2012. In Talks on a Budget Deal, Boehner and Obama Stand Alone. The New York Times. [Online] Available at: http://www.nytimes.com/2012/12/07/us/politics/at-boehners-request-he-and-obama-negotiate-alone.html [Accessed December 28, 2012]. Wessel, D., 2012. Finding a Prescription for the U.S.s Money Trap. The Wall Street Journal. [Online] Available at: http://online.wsj.com/article/SB10001424053111903454504576490491996443926.html [Accessed December 28, 2012]. Younglai, R. & Nomiyama, C., 2012. U.S. Economy Still Faces "Very Tough Challenges": Geithner. Thomson Reuters. [Online] Available at: http://www.reuters.com/article/2012/05/17/us-usa-economy-geithner-idUSBRE84G0O620120517 [Accessed December 28, 2012]. Read More