Economy of US Essay

President George W. Bush, in a speech before his economic team on August 8, 2007 talked about the nation’s thriving economy. President Bush said: â€Å"I just finished a productive meeting with members of my economic team. We discussed our thriving economy and what we need to do to keep it that way. We care a lot about whether our fellow citizens are working, and whether or not they’ve got money in their pockets to save, spend, or invest as they see fit. We talked about America’s role in the global economy. † (President Bush Meets) Looking at some major economic indicators, the President’s claim on the growth of the economy has some sense. For this paper, the following indicators will be discussed: the Gross Domestic Product – which measures overall economic productivity of the nation; Inflation rate – which measures the rise in the general level of prices; Unemployment or employment rate – which reflects the number of people with jobs; and Balance of Payments – which reflect the relationship between exports and imports. The United States Government uses two sets of tools that affect the American Economy. These tools are Monetary Policy and Fiscal Policy. The first one deals with how the government controls the supply of money and therefore the general stability of prices. The second one deals with government expenditures specifically how much the government is earning (taxes and revenues) and where will it spend the money (budget). Monetary policy is executed by the Federal Reserve System through its Board of Governors while Fiscal policy is carried out by Executive branch with or without the support of Congress. The U. S. Economy in Review The U. S. Economy is the largest and most powerful economy in the world. By the end of the third quarter of 2007 its Gross Domestic Product was close to $14 Trillion. Starting in 2004, the U.  S. economy was hit by significant events that tested its resiliency. The aftermath of the September 11 terrorist attacks led to major shifts in national resources to fight global terrorism. The costly war in Iraq led to a more costly U. S. occupation in Saddam Hussein’s country. Huge investments were made by the country for the war – investment in budget, resources and human capital. During the same period, Hurricane Katrina caused extensive damage in the Gulf Coast. Resources were diverted to aid those who suffered from the natural calamity. Oil prices soared between 2005 and 2006 also threatening the economy. Despite these setbacks, the U. S. economy posted strong growth during the period 2004-2007. Gross Domestic Product The U. S. Gross Domestic Product recorded growth rates of 2. 9 percent in 2004, 3. 2 percent in 2005 and 2006 and a leap to 4. 2 percent at the end of the third quarter of 2007. According to the Bureau of Economic Accounts, the increase in GDP primarily reflected increases in consumer spending, investment in equipment and software, federal government spending, and residential fixed investment. The President, in his State of the Economy address in January 2007, highlighted the strong and dynamic economy, and discussed the challenges faced in keeping the economy growing. The President stressed that the U. S. economy is resilient and responsive, adding more than 8. 3 million jobs since 2003 despite numerous challenges including a recession, corporate scandals, the 9/11 attacks, and the worst natural disaster in American history. Inflation Inflation is generally reflected through the rise and fall in the Consumer Price Index. CPI measures the average change over time in the prices paid by consumers for a market basket of consumer goods and services. During the period 2004 to 2006, CPI rose at a manageable level – indicating inflation is under control. No data was shown for 2007. In 2004 – CPI rose 3. 3 percent over the previous year. In 2005, the rate was at 3. 4 percent and in 2006 it slowed down to 2. 5 percent. The recent behavior of inflation shows it remains low and stable and has minimal impact on the economy (U. S. CPI) Unemployment and Employment  The number of unemployed persons was 7. 2 million in October 2007 according to the Bureau of Labor Statistics. A year earlier, the number of unemployed persons was 6. 7 million, and the jobless rate was 4. 4 percent. Also according to the BLS, total employment was at 146 million in October. Job gains occurred in professional and business services, health care, and leisure and hospitality. Manufacturing employment continued to decline, and construction employment was little changed. The employment-population ratio was at 62. 7 percent. The civilian labor force was at 153. million and the labor force participation rate was at 65. 9 percent. Balance of payment The country’s balance of payment particularly the relationship between the country’s exports and imports still show a deficit. The deficit decreased to $190. 8 billion in the second quarter of 2007 from $197. 1 billion in the first quarter. According to the Bureau of Economic Analysis, a decrease in net unilateral current transfers to foreigners and increases in the surpluses on services and on income more than accounted for the decrease. Monetary Policy The Federal Reserve System, the independent U. S. central bank, manages the money supply and use of credit (monetary policy), while the president and Congress adjust federal spending and taxes (fiscal policy). The government’s monetary policy is governed by the Federal Reserve System Board of Governors. The Federal Reserve’s monetary policy has stressed preventing rapid escalation of general price levels which usually leads to inflation. The Federal Reserve acts to slow economic expansion by reducing the money supply, thus raising short-term interest rates. When the economy is slowing down too fast, or contracting, the Federal Reserve increases the money supply, thus lowering short-term interest rates. The most common way it effects these changes in interest rates, called open-market operations, is by buying and selling government securities among a small group of major banks and bond dealers. A particularly tricky situation for monetary policy makers, called stagflation, occurs when the economy is slowing down and general price level (inflation) is rising too fast (U. S. Monetary Policy). The Federal Reserve’s recent monetary policy is towards keeping the overall economy on an adjustment path where growth is moderate and sustainable. As Federal Reserve Chairman Ben Bernanke mentioned in his Testimony Before the Committee on Financial Services, U. S. House of Representatives on July 18, 2007: â€Å"At each of its four meetings so far this year, the FOMC maintained its target for the federal funds rate at 5-1/4 percent, judging that the existing stance of policy was likely to be consistent with growth running near trend and inflation staying on a moderating path† (Bernanke). Given these conditions, the Committee decided to leave its target for the federal funds rate unchanged at 5-1/4 percent. The Committee further stated in its policy statement that some inflation risks remained and that additional action would depend on changes in the outlook for both inflation and economic growth (Monetary Policy Report 6). According to Janet L. Yellen, President and Chief Executive Officer of the Federal Reserve Bank of San Francisco in her speech on The U. S. Economy and Monetary Policy, â€Å"I think the current stance of policy is likely to foster sustainable growth with a gradual ebbing of inflationary pressures† (2). However, Yellen further stated that â€Å"a sustained moderation in inflation pressures has yet to be convincingly demonstrated† (15). Policy Actions taken by the Federal Reserve The Federal Open Market Committee in its meetings on June 27 and 28 and voted to hold the federal funds rate, the Federal Reserve’s main policy tool, unchanged at 5? percent (Monetary Policy Report 6). At the time the report was made to Congress, the funds rate has been kept at that level for the last twelve months. According to the Committee, this decision would avoid exposing the economy to the risk of a recession, while, at the same time, hoping that this policy will produce enough slack in goods and labor markets to relieve inflationary stresses. This direction will enable the Federal Reserve to achieve its dual mandate—low and stable inflation and maximum sustainable employment. In the past year, then Federal Reserve Chairman Alan Greenspan wrapped up an eventful 18-year career Tuesday with a final interest rate hike and cleared the way for his successor Bernanke to bring the long credit-tightening campaign to a close. Acting on Greenspan’s final day in office, Federal Reserve Board raised the benchmark overnight lending rate another quarter-percentage point to 4. 5 percent, pushing up borrowing costs for consumers and businesses in their ongoing bid to keep a lid on growth and inflation (Wolk). In the months after that, the Board came up with a series of cuts in interest rates to address the prevailing economic condition. This balancing act is in line with the Federal Reserve’s responsibility of trying to maintain full employment (generally considered to be around 4 to 5 percent unemployment) while keeping inflation low. One can imagine the risks and uncertainties involved in such act. Alan Greenspan once said, â€Å"Policymakers often have to act, or choose not to act, even though we may not fully understand the full range of possible outcomes, let alone each possible outcome’s likelihood. As a result, risk management often involves significant judgment as we evaluate the risks of different events and the probability that our actions will alter those risks (Greenspan). † . This delicate balancing act is done by using interest rates as a tool. When interest rates are low, capital is easier to acquire. Left unchecked, however, this leads to inflation. If interest rates are too high, however, the result can be a recession and, in extreme cases, deflation; the result of which can be economically devastating. There are two ways as to how the Federal Reserve influences the direction of interest rates: by raising or lowering the discount rate or by indirectly influencing the direction of the Federal funds rate. The discount rate is the interest rate banks are charged when they borrows funds overnight directly from one of the Federal Reserve Banks. The Federal funds rate is the rate that banks charge each other for overnight loans (U. S. Monetary Policy). Fiscal Policy When President George W. Bush first stepped into the Whitehouse in 2001 he promised several things to the American public. Among his list of promises which was an ambitious $1. 3 trillion tax cut. President Bush promised that â€Å"whoever pays taxes gets a tax break. † Campaigning for his second term in office in 2004, President Bush promised to make tax cuts that were earlier adopted in 2001 permanent. In his August 8 speech the President said: â€Å"Real after-tax income has increased by an average of more than $3,400 per person since I took office. † The President further stated: Tax cuts let Americans keep their own money. It stimulates entrepreneurship. † The President emphasized that he is against the plan to increase taxes and turn them into additional government programs and said: â€Å"We want the people to keep more of their own money because we understand that the American economy, entrepreneurs and small business owners are the ones who create jobs. † However, there is a growing opposition to his fiscal policies. Some say these cuts were distributed disproportionately. Higher income tax payers got the biggest breaks they say as opposed to lower income individuals. It is also important to note that during the first term of President Bush, federal spending increased by 26 percent. This seems to go in a different direction with the tax cut measures. On one hand tax cuts mean lesser revenue for the government, on the other, more money is needed as more money is being spent. It will not take a genius to figure out that the tax cuts, and significant increases in spending will have effect on the budget deficits during the Bush administration. From a surplus of $127 Billion when President Bush assumed office, the budget went to a deficit of $929 billion. Future impacts of these fiscal policies have been also widely discussed. Shapiro and Friedman believe: â€Å"Over the next 10 years, total tax-cut costs will equal $3. 9 trillion, reaching nearly $600 billion or 3. 3 percent of the economy in 2014 alone. The resulting higher deficits will slow future economic growth, saddle future generations with sizable interest payments, and leave the nation ill-prepared not only for the retirement of baby boomers but also for responding to potential future crises from security matters to natural or environmental disasters the particulars of which are unknown today. Even Former President Clinton went on record to criticize President Bush’s fiscal and tax policies: â€Å"Tax cuts are always popular,† Clinton said. â€Å"But about half of these tax cuts since 2001 have gone to people in my income group, the top 1 percent. I’ve gotten four tax cuts. Now, what Americans need to understand is that that means every single day of the year, our government goes into the market and borrows money from other countries to finance Iraq, Afghanistan, Katrina and our tax cuts,† Clinton added. We depend on Japan, China, the United Kingdom, Saudi Arabia and Korea primarily to basically loan us money every day of the year to cover my tax cut and these conflicts and Katrina. I don’t think it makes any sense. I think it’s wrong† (Stephanoupoulos, 2005). Former Federal Reserve Chairman Alan Greenspan also had a few words to say about President Bush’s policies. Greenspan criticized President George W. Bush for pursuing an economic agenda driven by politics rather than sound policy, with little concern for future consequences (Benjamin. 2007). Greenspan was quoted as saying: â€Å"The Bush administration turned out to be very different from the reincarnation of the Ford administration that I had imagined. Now, the political operation was far more dominant. † (Benjamin 2007). Comparing past presidents and the current Chief Executive, Greenspan said Richard Nixon and Bill Clinton were the most intelligent; Ford the most normal and likeable; Ronald Reagan was the most devoted to free markets; George H. W. Bush, the current president’s father, was very cordial. However, Greenspan saved his harshest criticism for Bush. `Little value was placed on rigorous economic policy debate or the weighing of long-term consequences,† he wrote. (Benjamin 2007). Still President Bush remains steadfast saying: â€Å"When people earn money, tax revenues go up. This year, tax revenues are expected to be $167 billion higher than last year’s, because the economy is growing. Growing tax revenues combined with spending restraint has helped us drive down the federal deficit, and we were able to do so without raising the taxes on the people who work, or without raising taxes on small business owners or farmers. Estimates show the deficit will drop to $205 billion this year. That is well below the average of the past 40 years as a percentage of our economy. † (President Bush Meets) Conclusion Not too many believed that the U. S. economy can rebound so fast from the series of unfortunate events of 2004 to 2007. Yet the number one economy in world has proven its resiliency and durability by weathering these storms. Much of the credit should go to the managers of the economy. The adoption of effective policies and strategies were the keys to sustaining the growth even in the midst of uncertainties. However, the growing opposition to the President’s Fiscal Policies needs to be given more attention. The clamor does have its points. Tax cuts, everyone must understand, have side effects. Remember, it is from taxes that the government generates revenues. Revenues that are badly needed to fund the operations of the government. These are the same revenues that run schools, hospitals, provides welfare to the poor, and funds homeland security and the war against terror. Without revenues where does the government go? What does it do? It borrows money. Huge amounts of money that, in the end, would be marked as owed by every individual in this country to some bank or foreign government. Overall, greater challenges loom ahead. The economy still faces long-term problems including inadequate investment in economic infrastructure, rapidly rising medical and pension costs of an aging population, sizable trade and budget deficits, and stagnation of family income in the lower economic groups. The country will call on again the time tested policies to deal with these adversities. As President Bush said â€Å"Our economy is on the move and we can keep it that way by continuing to pursue sound economic policy based on free-market principles. â€Å"