The current state of the US economy is taking a diving move due to the financial and economic crisis. The present administration came into supremacy with a lot of optimism from the American people when President Obama staged his campaign with a promise of change, but there has been no significant change, according to various economic indicators.
The rate of GDP growth
According to the Bureau of Economic Analysis estimates, the current rate of annual growth rate of the real GDP in the year 2011 estimates to be only 1 percent. This translates to 0.25 percent growth rate as the quarterly growth rate (Gallup, 2011). This rate of economic growth is exceedingly insignificant compared to the 3.3 percent growth rate that the economy experienced in the last quarter of last year. The instability of economic growth rate has increased the unemployment rate through minimal job creation and increased layoffs. This paper will fall out the current state of the US economy and discuss the theoretical perspectives for this state of the economy.
Economic indicators
It is indispensable to look at the various economic indicators and other factors that contribute to the growth of the country’s GDP (Tanous, 2011). The second quarter of 2011 saw an increase in the number of goods and services by $8.15 billion of the actual production in the first quarter. This rate of growth is exceedingly insignificant even if calculated on an annual basis. The growth in production and sales volume of goods and services is hugely beneficial in developing a stable economy through a healthy balance of trade. This is evident since exports will exceed imports (Gallup, 2011). A growth in production and service industries leads to job creation and, therefore, solving the problem of unemployment.
Production and service industries have been growing at a low rate, which has left many people jobless. There has been an increase in disinvestment over the last two years with an estimated figure of $16.2 billion per year (Clark, 2011). This is not an admirable thing for the economy because all the weak spots, which ought to, be strengthened by investments will remain stagnant. The second quarter of 2011 saw a 10 percent drop in inventory investment, which signifies a decidedly negative trend. Businesses no longer invest in plant and equipment, and this can drive the country to an economic recession like the one experienced in 2008 (Clarke, 2011).
The recovery efforts such as stimulus package by the government have resulted in moderate growth rates that cut across all sectors of the economy. Although there was an end to the output recession from the beginning of 2011, the current rate of unemployment is still a harsh reality that citizens have to be contended with in the near future (Census Bureau, 2009). There was a significant increase in consumer purchases, in 2009 and 2010. There was also a general increase in consumer spending because of a notable increase for income available to consumers. The country was experiencing a smooth growth in the real Gross Domestic Product until the fourth quarter of 2008 when variations started to appear. The components of aggregate demand are clear indicators of a macroeconomic challenge. The economy started slowing down in the last quarter of 2008 this affected the growth of gross domestic investment purchases (Garman, 2009). A decline in investment purchases has been a substantial macroeconomic problem affecting the US economy due to a decline in aggregate demand.
Private, domestic investment has also been on the turn down over the last six and half years. Private, domestic investment includes residential construction investment, which is a tremendously significant economic indicator (Garman, 2009). Although the decline started back in the year 2005, the current rate of decline has brought devastating effects to the US economy. There was a net sell-off of inventory in the fourth quarter of 2007 that occurred due to the problem of decreasing inventory investment. Residential constructions together with inventory investment are the two principal components of private, domestic investment that make a significant contribution toward the growth of a country’s GDP. The recession that occurred in the year 2008 was due to low private, domestic investment (Swanson, 2011). Investment in plant and equipment was on the decline in 2008, and this caused a lot of damage to the economy.
The price level and interest rates are the two crucial factors that affect private, domestic investment. The decline in private, domestic investment concern with high price levels together with high interest rates. Investment in plant and equipment has been on the decline because of high inflation and interest rates. The increase in price levels was an effect of output inflation that occurred in 2008 (Tanous, 2011). The automobile and construction industries are the leading industries that were affected in a great way by the 2008 economic recession. The current administration has been trying its level best to revive the automobile industry, but it is yet to stabilize. The decline in the value of the US dollar against other leading currencies is another reason why the US economy has been performing poorly (Gallup, 2011). A weak dollar affects international trade. Import of necessary raw materials that aid in production will be expensive. However, a decrease in the value of the dollar has been the reason why there has been a significant decrease in the trade deficit. A country such as China has registered significant growths in its GDP due to currency undervaluation.
The government sector purchases have also been on the decline since 2008. Both state, and local governments have significantly reduced their purchasing, and this is attributed to a decline in tax revenues collected by both the local and federal governments (Gallup, 2011). Consumer purchases especially nondurable purchases have been increasing at a steady rate since the 2008 recession. It is necessary to note that the 2008 recession did not affect public investments and, therefore, the demand for goods and services was not affected (Clark, 2011). There have been variations in the demand for both durable and nondurable goods in the last two years. The expenditure on services has been increasing in the recent past, and this has made average income earners continue struggling. It is extraordinarily expensive to purchase services compared to durable and nondurable goods. Access to quality medical care has been a considerable problem to the majority of the citizens due to high medical insurance premiums (Strawser, 2008). The government has responded through a bill that will subsidize medical expenses for average citizens.
The government is also working towards raising insurance premiums for high-income earners and lowering medical insurance for low-income earners (Clark, 2011). Although the health bill is still facing a lot of opposition, its implementation will ensure that all citizens access quality medical care. Access to better health facilities is an indicator of economic development.
The US economy is still suffering from the effects of the 2008 recession output. Investment demand and consumer demand began declining in the last quarter of the 2007 financial year. The current unemployment rate is not entirely attributed to the output recession (Clark, 2011). When Fannie Mae and Freddie Mac were declared bankrupt in 2008, it was clear that the country was headed for an output recession. This led to the closure of some financial enterprises creating panic in the stock market. The future of the US economy was undoubtedly going to be affected by the decline in investor confidence.
Theoretical perspective
The current US economic growth decline attributes to a decline in personal consumption expenditures, exports, government and federal spending, as well as nonresidential fixed investment. The economy’s imports levels increased significantly lowering the amount of GDP. The main components of a country’s GDP are personal expenditures, government spending, public and private investments, and favorable balance of trade. According to the Keynesian school of thought, the current state of the US economy needs positive contributions from all components and direct government intervention to realize the expected growth. In order to recover fully from the effects of the 2008 recession, it is necessary for the government to implement policies that will stimulate aggregate demand. The stimulation of aggregate demand will in turn encourage private, domestic spending and an increase in purchases of goods and services (Swanson, 2011).
The economy can attain full employment levels through an increase in injections in terms of public spending, which will encourage investment in plant and equipment, thus creates disequilibrium between injections and leakages. When there is an imbalance, more jobs are available. This translates to high demand due to increase in income. The disposable income is either saved or spent by individuals (Strawser, 2008). The current administration is utilizing the Keynesian school of thought beliefs, and policies by coming up with policies that encourage government spending and taxation as a way of overcoming economic recession. The health bill sponsored by White House is meant to subsidize medical insurance premiums for low-income earners through government funding (Clark, 2011). Imposing high income tax for high-income earners compared to low income earners is a Keynesian way of stabilizing the economy. Before 2009, the US economy largely depended on private spending, and as a result, an economic recession experience had been inevitable. According to the Keynesian theory, the government should increase its spending rather than relying on private spending. Private spending leads to inflation, which affects aggregate demand, hence low employment creation rates and growth levels (Clark, 2011).
Conclusion
Government policies
According to Knoop (2010), the Keynesian theory is used to decrease government spending and increasing taxes in a case where private spending is high. The government should always control recession and inflation rates. The government can employ demand management policies to stimulate growth and avert unemployment that is soaring.
Keynesian theory in practice
The Keynesian theory favors low-income earners, and policies inspired by this theory are always opposed by the rich (Tanous, 2011). The shortfall in demand, due to recession has negatively contributed to poor growth and increased unemployment. The current administration focus mainly is stimulating demand in order to attain equilibrium in the economy. This is through stimulus packages, and use of progressive taxation system.
References
- Census Bureau. (2009). Statistical abstract of United States economy 2010 (hardcover). New York: Government Printing Press.
- Clark, C. (2011). The American economy. New York: ABC-CLIO.
- Gallup, A. (2011). The Gallup poll: Public opinion 2010. New York: Rowman and Littlefield.
- Garman, E. (2009). Personal finance. New York: Cengage Learning.
- Knoop, T. A. (2010). Recessions and depressions: understanding business cycles. 2nd ed. New York: ABC-CLIO.
- Swanson, P. (2011). An introduction to the US economy. New York: Taylor and Francis.
- Strawser, C. (2008). Business statistics of the United States: Patterns of economic change. New York: Rowman and Littlefield.
- Tanous, P. (2011). Debt, deficit and the demise of the American economy. New York: John Wiley and Sons.