Economic Outlook- How badly has the U.S Economy Been Damaged
The article choice was one that was related to economic theory, highly informative and unbiased. The article under review is John Cassidy’s ‘How badly has the U.S Economy Been Damaged?’ retrieved from The New Yorker. The article was used for purposes of analyzing effect of damage that was inflicted on the United States economy as a result of the previous recession. The analysis was carried out using numerous economic indicators, like unemployment rates, capital and GDP. Additionally, it also formed an analytical view of potential of US economy to rebound back to the prior robust levels. This article relies on statistics that were collected over extended periods showing different economic indicator statistics.
Cassidy based his analysis by making the argument that increased rates of employment in the US should signal the Fed reserve to ease on monetary policies. The easement, he argues would aid to increase liquidity, reduce the rates of interest as well as increase consumer spending. This would lead to increase in the GDP, investment and capital which would signal the economy was robust. Cassidy, however uses a survey carried out by 3 leading economists and academicians from the Federal Reserve; David Wilcox, William Wascher and Dave Reifscheneider. They had the hypothesis that recession not only had a negative impact on the United States economy but has limited its capacity in having a robust or positive future growth. The reason that was attributed for this analogy is that main economic inputs for the US (Capital, technology and employment) have experience sluggish or reduced growth rates, which signify slowdown in the economy.
Therefore, there has been reduced growth in the GDP which has reduced innovations and investment within the manufacturing and corporate, and which will have long term effects on reduction in future economic sustainability and recovery. This analogy is exemplified further by comparing the rate of growth figures before 2007 and the current rates, which clearly indicate that the outlook is slow. For example, between 2000 and 2007, the average GDP was 2.6% while it was 1.3% in 2012, which suggests the growth of the US economy has been halved (Cassidy, 2013). Cassidy however argues that this phenomenon is normal and had been seen in Europe previously where the high rates of unemployment and reduced growth had effects that were long term following World War II. To revert the prior figures, the Fed reserve is supposed to work on increasing demand as their effects have been proven to be successful already as it is evidenced in 1990s. The effect this will have is that of reducing capital deepening, increasing investment, innovations as well as consumer spending.
The Federal therefore, should revise its monetary policies in order to make sure the strategies taken leave positive influence on economy in the long term and that they reverse the sluggish rates of growth. For example, following the great 1930s depression, the country started on a demand driven growth prospectus which ultimately rebound the country’s economy to prior robust levels after World War II. On top of this, the USGDP has been on a constant rate of growth while analyzing the figures between 1870 and 2008 which means the current sluggish rate of growth can be reverted by applying stringent monetary policies, stable politics and capitalism in the country.
Critique of the article
The article applies few economic policies and indicators to formulate growth strategy for the United States economy. These indicators are mostly used in employment rates, GDP growth history and capital inflows to judge state and future of the United States economy following the recession in 2007.
This view is limited since other factors must be considered as well including current political financial resolutions passed so as to cushion the economy against after effects of recession. Indicators, like the inflation rates, interest rates, Forex exchange rates, consumer price indexes (CPIs) and balances in trade among others are supposed to be used in order to make informed prediction for current statistics, future growth and comparison to past rates of growth (Thomas & Carson, 2011).
For instance, after the recession, the treasury was forced to reduce liquidity through enacting monetary measures like increasing interest rates and taxing middle income earners and corporate. The increase in interest rates had direct effect on curbing investments because the capital was limited and very expensive to access. Companies therefore, had to cut down on overall spending in order to manage within stringent economic measures, remain afloat and raise monies for loans repayment. Reduction in investments also meant innovation was reduced and so was use of technology. These resulted to weakened GDP since these companies became less productive, they increased production costs, had lesser sales of services and goods. As such, this ought to have been the analogy Cassidy used as the resultant explanations for a sluggish economy and a future of reduced growth rates.
Taxation increases were also levied by the US government so as to recover monies spent on their bailout plans which were intensive and which resulted to use of billions of dollars. The bailout was majorly used in private sector and considered the primary economic drivers and as majorly responsible for occurrence of recession as a result of the capitalist system in the US. The additional taxation system, therefore coupled with reduced consumer spending, high rates of interest and inflation resulted to small and medium enterprises (SMEs) and corporates having to cut costs down through changing spending habits. This means the costs channeled to innovations and investments were as well reduced and the subsequent effects was reduced future prospective growth for companies.
The rising income statement was deemed as one of the mechanisms of slitting the operation expenses down. This resulted to massive job cuts which ultimately led to increased rates of unemployment. Engagement in employment drives by companies was deemed as high investment risk and results to increase in unemployment rates from 4.5 percent in 2000 to 8.0 percent in 2008. This meant the overall productivity of the nation was reduced and it had the direct effect of reducing the levels of income of the population and it reduced consumer spending as well as they resorted to saving instead of spending.
The rising taxation therefore and interest rates led to increases products prices, higher CPIs and high rates of inflation. The high unemployment rates as well resulted in reduced productivity as well as reduction in factors of the economy that are responsible for control of consumer spending and the optimal production of services and goods (Besanko, Iraeutigam & Gibbs, 2010). The ultimate effect, therefore was that the GDP became reduced considerably and a weak GDP translated into a weak economy. Statistics therefore indicate the current GDP rates are not affected merely by unemployment rates but by other influential factors. Rates of unemployment cannot be used merely to indicate economic growth rates since it marginally affects GDP and is influenced by other factors that are more dire.
John Cassidy’s article makes the attempt to analyze these trends as well as formulate a future forecast for state economy by relying on different factors deemed as economic drivers. It as well argues that episodes of slight growth have costs that are seriously long term and some short term costs. Slight growth is caused by low investment levels and high unemployment rates which have a negative effect on the economy. Increase in demand could positively affect the economy owing to increased investor and consumer confidence. The diseconomies of scale that afflict businesses currently have to be resolved in order to drive growth, enhance profitability, increase figures of employment and increase consumer spending.
The positive drive cannot be attained if the Federal Reserve carries on to curb funds that are crucial for purposes of investment. Tightening federal rates leads in stable inflating rates and easy control of interest rates and the maintenance of strong currency. Afflicting businesses would resolve to enhance profitability, drive growth, increase figures of employment and hence, increase consumer spending. However, due to recent positive trends in the recovery and development of the economy, the situation needs to change to match the current positive trend.
Cassidy, J. (November 8, 2013). How Badly Has the U.S. Economy Been Damaged? The New Yorker. Retrieved from http://www.newyorker.com/online/blogs/johncassidy/2013/11/hysteresis-and-the-us-the-bad-news-and-the-good-news.html
Besanko, D., Iraeutigam, R., & Gibbs, M. (2010). Microeconomics. (4th Ed.). US: John Wiley & Sons.
Mankiw, G. (2011). Principles of Economics. Mason, OH: Cengage Learning.
Thomas, W., & Carson, R. B. (2011). The American Economy: How It Works and How It Doesn’t. New York, US: M.E. Sharpe.
US Bureau Labor of Statistics. (14 March 2013). Current US Unemployment Rate 7.7%.