U.S ECONOMY – Copy
8 November 2015
Economic situation in U.S
Current economic situation in U.S is demanding; the current macroeconomic state has been termed the worst and unstable. Different researchers and analysts have proved beyond any doubt that due to slow economic activities growth of the economy is always hampered with clear indications from corporate profits, GDP and unemployment, and inflation rising slightly higher. Countries that have recently fallen into economic instability employ monetary and fiscal policies by increasing money supply into the system through loosening of monetary policies. Reducing taxation while increasing government spending is also a concrete solution used in curbing economic crisis (Mian et al. 64).
One of the goals stipulated by the Federal Reserve in their labor laws is to maximize employment. Many casual workers tend to believe the new system is working due to statistics released currently by the Bureau of Labor Statistics that unemployment stands at 6.3 percent. However, according to Bureau of Labor Statistics the declining rate of unemployment is not reflected in the economy, stagnant wages is still experienced though Federal Reserve Board Chair Janet Yellen reassured a growth of 3 to 4 percent in wages.
Employment is the main cause of economic growth in the US, for the past three years employment has experienced severe decline that is alarming. According to government statistics, unemployment has been growing from 5% to 6.3% consistently. The majority of the people who have been suffering in the job market mostly are the youth who have been graduating from universities and colleges. Recent research conducted by the University of Michigan School of economics and monetary studies shows that calculated jobs being created annually from the previous economy job market were 155,000, reflecting how the rate of employment percentage hasn’t changed.More than 300,000 jobs are needed monthly to bring the figures to the desired level. The most affected states with un-employment are those with dense population figures such as the Baltimore, Alaska, Minnesota, forcing many people to engage in criminal activities like gangs and other illegal activities to meet their basic demands.
Fiscal policy includes fiscal stimulus that entails a combination of tax cuts and increase in government spending. According to Canuto et al,. an increase in spending has a positive impact on the economy by stimulating demand for goods and services eventually resulting to increase in income and employment (42). The rise in income and employment indirectly affects private consumption positively and at the same time exhibiting purchasing power of firms and households. An economy experiencing instability with inflation and low resource exploitation, the aggregate demand, and inflation can only be boosted through government spending. On the other hand, the central bank has to keep interest levels stable or low to reduce crowding that will jeopardize the fiscal multiplier.
Lowering taxes is also a policy used under fiscal policy. It has more advantage to firms and households income as compared to rising government spending. Economic supposition stipulates that an amount of tax cut or reduced can be invested in other options as firms and households prepare to pay for forecasted rates in consolidated fiscal conditions. During the recession, households and firms get exposed to the high rate of borrowing and reduced access to credits this is because their wealth has subsequently been reduced by high tax and lending rates in credit markets. Tax reduction helps in empowering firms and households to spend more resulting to employment and reducing inflation (Islam et al. 28).
Fed’s quantitative easing program convinced many that a lot of money will be created and in circulation. According to Bureau of Labor Statistics, only a few of the dollars get into people’s pocket and the economy at large, much of the money is still parked in bank reserves. This has been caused by slow lending rates by banks; banks still fear to go back into recession experienced during the crisis though the Federal Reserve System and monetary policy advocates for substantial lending to speed economy recovery.
Wages grow when prices go up; meaning when the price of products and services go up it simultaneously activates high wage demands. The economy is still recovering slowly resulting to the high cost of living and companies are becoming reluctant or rather afraid to raise prices as a result of the low cost of living. Mian et al. (54) concludes that “cost of living will remain relatively low despite policies put in place by the Federal Reserve System and Monitory policy until the economy recovers completely.”
However during hard economical times the Federal Reserve should employ a unique monetary policy that adjusts the composition and the size of its balance sheet. It should also come up with effective channels of communicating financial information to households and firms during the recession period to present time. The Fed should also come up with a distinctive gauge responsible to measure how monetary is working on economic indicators like inflation and unemployment. The gauge should show quarterly average unemployment and funds rate, prices of basic commodities and services, and expenditure. Unemployment and inflation can be solved through a cut in the funds rate. The Fed should create an empirical policy that proposes reducing funds rate by 1.3 percent if the inflation rate is at one percent and two percent if unemployment percentage falls above one percent (Canuto et al. 72).Regarding communication, economic theory creates the best duration at which the Fed should communicate shortfall in any policy. Monetary policy is a process used to give hope to the private sector on future expectations on short term and long term interest rates and prices of assets to enhance macroeconomic goals.
The other monetary policy used is the balance sheet action. This was a unique tool used in early 2008 which dislocated and strained financial and credit markets, and such amendments in funds rate affected quickly the price of assets and interest rates. Due to illiquidity and dysfunction of spreads, Fed were forced to start lending directly to counterparties that were against the collateral set with an aim of achieving liquidity and upgraded flow of credit in financial markets and economy (Canuto et al. 52).The Fed should increase the size of its balance sheet to avail credit to business and households through lowering costs. Adjusting the balance sheet is achieved through buying securities by the Fed in open markets with a propelling mind that incase interest rates fall to zero there will always be a solution in lowering long-term interests. They should also lower mortgage rates to reduce long-term borrowing by businesses and households to refinance or buy homes.
Bordo, Michael D., Claudia D. Goldin, and Eugene N. White. The defining moment the Great Depressionand the American economy in the twentieth century. Chicago: University of Chicago Press, 1998. Print.
Bureau of Labor Statistics. Review of the monetary policy framework. London: Stationery Office, 2015. Press
Canuto, Otaviano, and Danny M. Leipziger. Ascent after Decline regrowing global economiesafter the great recession. Washington, D.C: World Bank, 2012. Print.
Islam, Iyanatul, and Sher Verick. From the great recession to labor market recovery issues, evidence and policy options. Houndmills, Basingstoke, Hampshire New York Geneva: Palgrave Macmillan International Labour Organization, 2011. Print.
Mian, Atif, and Amir Sufi. House of debt: how they (and you) caused the Great Recession, and how we can prevent it from happening again. Chicago London: The University of Chicago Press, 2014. Print.
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