Will this current recession be more severe and grave than that of 2001? The questions – Whether the U. S is in recession or not? Will the economy of the U. S collapse badly? The United States is facing the horrendous economic problems. The boost during the past few decades in the U. S economy came from the consumer spending and the investment in the residential side rose which led to an increase of 8% of GDP which really bolstered the economy. But that process resulted in the deficit in the current account balance of the country in 2006 because consumers didn’t adopt the consumption-smoothing motive.
The author takes the case of GE as a simile to the U. S economy because the company has adopted more of the banking side which used to issue mortgages and credit cards; but now it has forced the company to the financial crisis. The budget deficit of the country is likely to be 13% of the GDP due to the declining tax revenues which resulted by the distortions. The country’s economic policy should have adopted the Tax-Rate Smoothing in order to reduce the effects of distortions over tax revenues and on the economy as a whole. We have seen in the past 18 months that the U.
S government provided huge amount of stimulus packages to many firms, such as AIG in order to bail out their balance sheets and debts and keep them on track. Some firms were bankrupted where as some were nationalized. After all those stimulus packages, the economy is still unable to fully get out of the recession in spite that the country is a great source of demand for the other countries. What is alarming for the U. S economy is that it used to contribute positively in the global growth, but this year it won’t be the case because this time it is going to lessen the global growth.
The Conference Board has just recently suggested that the country’s economy would be getting out of recession in the months ahead after they compiled the index of leading indicators. Some of the statistics for the month of May, 2009 are as follows: Private wage and salary disbursements decreased $12. 4 billion in May, compared with a decrease of $0. 7 billion in April; moreover, the purchases of existing homes increased 2. 4 percent in May, according to the National Association of Realtors.
These statistics show that the economy is still suffering from recession, and it might be because of other factors such as high long-term interest rates that might result due to the continuous introduction of the stimulus packages which on the other hand increase the debts. However, on the other side, there is a reluctance in the consumers to spend their money generously, especially in this recessionary period. It is because they are facing unemployment; and those who are employed are facing stagnant wages which do not provides the consumer the leeway to spend freely.
In other words, people can’t experience the concept of Marginal Propensity to Consume. Moreover, the spending has another outcome that hinders the economy to grow, and that is Liquidity. People are reluctant to invest money in the assets such as houses; their purchasing power is very low as they are skeptical of the future of financial situation in the country. If the demand from other countries take place then it would at least increase the total spending of consumers even if the citizens of the U.
S are not spending. (See the first graph in the appendix, source: US Bureau of Economic Analysis). The cyclical unemployment is also increasing and many firms in the country laid-off their employees last year and are doing so this year too. Keynesian approach also helps to further explain this issue because it takes time to prices and wages to adjust themselves enough to achieve the full-employment level. (See the unemployment graph in the appendix; source Bureau of Labor Statistics) Current Economic Indicators
July 29, 2009 (Close of Day) Indicator Value Inflation % -1. 19 GDP Growth % -5. 56 Unemployment % 9. 50 Gold $/oz 931. 00 Oil $/bbl 63. 35 Furthermore, the chief economic adviser of Mr. Obama said that the U. S economy must be more export-oriented and less consumption-oriented. The manufacturing side of the country, for instance, car maker companies are facing the music of the current recession and are lowering their production due to the low demand for the cars, which is resulting in the lessening of the exports.
Another thing that might help the economy to recover is the cheaper currency; means that the country should adopt the policy of devaluation. By doing so, the exchange rate will fluctuate and would encourage the foreign trade. What actually is keeping the economy to recover is the lack of equilibrium; because at the supply side, the investment has plunged due to presence of uncertainty and would take time to rise. Again, the reduced exports are restricting the financial inflow that the country could get.
Conclusion Consequently, the economy of the U. S is facing the economic downturn even after one year and seems not to be recovered very soon. The financial crunch has forced the economy to slow down and has led the growth to become negative; the issues of unemployment, high debts, and low consumer spending are the major concerns that are restricting the certainty and consumer confidence to build up and let the economy escape of the depression.
People are facing low wages due to which their spending and demand has fallen sharply and unemployment is still expected to rise in the coming months. Moreover, the exports have reduced and the financial inflow is not there. What can help the economy to recover is the devaluation in the currency which might encourage foreign trade and exports. To sum up, the U. S economy will take time to get out of the downturn and those who are employed would have to work on low wages. Glossary
Consumption-smoothing motive: The preference of people for a relatively constant or stable pattern of consumption over time, as opposed to having high consumption at some times and low consumption at others. Distortions: Tax-induced deviations in economic behavior from the efficient, free market outcome. Tax-rate smoothing: A policy of maintaining sustainable tax rates over time so as to minimize the distortions created by the tax code. Marginal Propensity to Consume: The concept that the increase in consumption occurs with an increase in disposable income (income after taxes and transfers).
Liquidity: The ease with which the asset can be converted into cash, goods, services, or other assets. Cyclical Unemployment: Unemployment that rises during economic downturns and falls when the economy improves. Keynesian approach: An approach to macro economics based on the assumption that wages and prices may not adjust quickly to equate quantities supplied and demanded in each market. Devaluation: A reduction in the value of a currency by official government action under a fixed-