Good Example Of Essay On Current Economic Situation
Even though the American economy remains to be world’s largest, it still suffers unemployment problems. For the past three years, unemployment has been reducing steadily, but the macroeconomic problem is not yet close to a point where is cannot pose a risk to the economy. In 2013, the economy was in recession, but the first quarter of 2014 indicated that there was recovery; there was a growth of 4.2%, which was followed by a growth of 4.6% in the second quarter (Nickel, 2014). Despite this positive impact, the American economy still struggles with post recessionary macroeconomic problems among them unemployment. Based on this insightful overview, the paper seeks to delve on unemployment as the major problem experienced in America, and later identify fiscal and monetary policy that would be appropriate in alleviating the problem.
Unemployment situation in America
Since 1990’s unemployment has been spiraling consistently, but the two recessionary periods influenced their increase. In the recession of 2001, the rate of unemployment increases, but the peak was observed in 2007, when the American economy experienced a great recessionary period. In 2013, the economy experienced a recessionary period, which increased the rate of unemployment, but it did not increase past the level observed in 2007 (Carlberg, 2012). Americans currently believe that unemployment should be a priority politicians should offer solutions because the macroeconomic problem affects do not only increase pressure on public funds, but increase social costs. In 2012, the presidential campaign kept promises that the government will tackle with the problem of unemployment in totality, but the fiscal cliff shifted attention of the central authority making it to focus on regulating debts at the expense of the spiraling unemployment. The President Obama’s government was opposed to the move to increase taxes, but the fiscal cliff required that taxes were to be increased, while government spending was to be reduced. All this fiscal measures contributed to increase in the rate of unemployment because they were not checked conclusively.
Most Scholars attribute the current unemployment situation as caused by labor mismatch. Categorically, the labor supply of full of people with low skills and experience necessary to take part in the production of goods and services and for that reason, most firms have been relying on foreign or imported skilled labor. The American labor market is known to be one that seeks to reduce the cost of operation; however, the labor supply in America demands for a high pay, which most firms cannot afford. For that reason, most of the firms have relocated their production processes to other countries where the cost of labor is low hence increasing the rate of unemployment at home.
The 2007-2009 financial crunch prompted many companies to devise cost effective ways of operating to avoid situation where external funds are needed to boost business operations. Many companies especially in the manufacturing and service industry have automated their services, a move that has made it necessary to restructure. During the great recession, small firms, unlike large firms, restructured their operations because they wanted to get rid of unwanted labor force. Middle and low management levels of organizations experience the impacts of unemployment because they form the majority of the working class in America. The Bureau of Labor Statistics acknowledges the fact that short-term unemployment has been reducing because of the increase in investment and adjustment of other macroeconomic variables. However, long-term unemployment remains to be a problem, which the Federal Reserve and the government are struggling to find answers. The U.S. Bureau of Labor statistics reported that the marginal increase in labor demand is not enough to change trigger a positive impact on the pay checks of a few who were recently employed and the net effect both in terms of macroeconomics and micro-economics remains negative (Nickel, 2014). In essence, the Federal Reserve and the Government of U.S. have to find a lasting solution to the chronic unemployment problem.
Fiscal policies appropriate at this time
According to the Keynesian school of economic thought, the American government has to adopt expansionary fiscal policies that include tax reduction, and subsidizing essential sectors among other measures. Since the recession of 2007, the U.S. economy has increased taxes to settle the increased foreign debts and fund the health and security sectors, which account for large allocations of the budget (Carlberg, 2012).
In order to alleviate the macroeconomic problem of unemployment, the American government has to reduce taxation to reduce the cost of living and therefore increase aggregate demand. The increase in aggregate demand will encourage investment, which in turn will reduce the rate of unemployment. The main rationale why most of the American based firms such as Apple Incorporation shifted their operations to Asia is that they used to be taxed highly and the cost of labor was high too. Tax reduction has a direct impact on controlling the inflation and encouraging economic growth. Even though the rate of inflation in America remains to be low, there is still much the American government can do to reduce unemployment.
The American government can boost economic growth by subsidizing essential sectors such as manufacturing, construction, and tourism among others. Such a move will have an impact on reducing the operational costs thereby increasing labor demand because of the increased production activities. Employing the expansionary policies such as encouraging investment will at the moment work to alleviate the problem of long term unemployment. However, there are sectors that require reduction of spending, while others require increase in government spending (Mishel & Bernstein, 2009). For instance, reducing spending on health sector and defense means that the government would have created additional funds to be utilized in giving incentives to vital sectors and subsidizing foreign trade. Currently, the GDP growth is at 1.9%, while the rate of unemployment stands at 7.5%. Relatively, the GDP growth is too low to trigger the economy into reducing the rate of unemployment. To increase the GDP growth, there is the need to boost foreign trade; there is the need to implement 2010 Dodd Frank act, which seek to lower public debt because it encourages government spending in sectors that do not contribute on economic growth. Apart from that, the government should improve infrastructure in non-metropolitan regions to discourage industrial agglomeration thereby reduce the rate of unemployment uniformly.
Monetary policies appropriate at this time
It is true that the American economy is operating at less than full employment of resources because it has been experiencing unemployment cases for a long period. It is evident that the demand side of the economy is not maximizing its potential thereby making firms to outsource some of their production processes as locals decrease consumption. To alleviate the situation, there is the need for the Federal Reserve to reduce rates of interest as a way of increasing the amount of money in supply (Mishel & Bernstein, 2009). The Federal Open Market Committee should consider buying government securities to increase the amount of money in supply. Increasing the amount of money in supply encourage investments, a move that will help in reducing the rates of unemployment in the long-run. Firms that outsourced their operations will be encouraged to return and improve the local economy because they will have access to the increased capital, which they can use in expanding their operations.
Even though influencing the value of the U.S. dollar has an impact on global trade, it will improve investment and hence reduce the rate of unemployment. Re-pegging exchange rate or depreciating the exchange rates has an impact of lowering the cost of local goods and services on the international market. With time, the net exports will increase and foreign business players register profits (Nickel, 2014). In so doing, the American terms of trade will improve hence ensuring that the balance of payment will record a surplus. Such a move will encourage foreign direct investment because many firms will want to invest in a country whose foreign demand of goods and services is high. In so doing, the local people will get employment not only in the short run, but it will be sustained even in the long run as long as the government and the federal reserve continue supporting their operations.
The American economy has been experiencing the macroeconomic problem of unemployment for long since the great depression. Recessionary periods that have occurred in 2003, 2007, and the recent 2013 have been worsening the problem of unemployment. Although there have been a decline in the rate of unemployment, long term unemployment continues hitting the American economy. In order to alleviate the problem, there is the need to reduce taxes and increase government spending to spur economic growth through increase in investment activities. Apart from that, conducting open market operations that, seek to increase the amount of money in supply helps in encouraging investment activities in America hence reduce the rate of unemployment. In employing these measures, the American economy will reduce the chronic problem of unemployment.
Carlberg, M. (2012). Unemployment and inflation in economic crises. Berlin: Springer.
Lynch, M. (2014). GENERAL ASSESSMENT OF THE CURRENT ECONOMIC SITUATION. OECD Economic Outlook, 2(94), 9-65.
Mishel, L., & Bernstein, J. (2009). The state of working America: 2008-2009. Ithaca, N.Y.: ILR Press.
Nickel, S. (2014). Unemployment and Labor Market Rigidities: Europe versus North America. Journal of Economic Perspectives, 11(3), 55-74.