Governments fashioned by politicians are accountable for making and implementing economic policies that direct a given country in the way forward into improved social welfare, economic development and growth and many other areas of day to day life. In the just concluded US elections, we noted that economic issues comprised the major campaign platform issues: collapse of financial market, high inflation rates, high unemployment rates, economic stagnation etc. The public voted in the candidate whom they considered had the best polices in mind on the way onward of improving the deteriorating economy not in the US alone but globally.
Since the December 2007, investors in the US market were worried that the economy was registering very minimal growth with some of them such as Warren Buffet declaring that the US economy was already in a recession i. e. experiencing negative growth. Other forms of assurance s form the World Bank that the country would probably experience 0% growth rate have been met with resistance with many equating the situation to the Great Depression of the 1930’s (Weiner, 2008). Just how bad is the situation? What are the possible causes that could have led to this?
This paper responds to these questions by discussing the macroeconomic problems that are ailing America today and reviews theoretical explanations offered by economists in handling such problems. Unemployment Classical economists view labor force as the number of people in a given economy willing to trade their employment services for wages and salaries. According to Reinhardt (2006), this number of people is the main contributors to national Gross Domestic Product (GDP). They are again the highest taxpayers providing revenue to the government to run its activities.
Factories and industries require labor input from the labor market to facilitate production of good and services. The labor market is guided by the general law of demand and supply though complications arise due to various factors such as level of skill and mobility of labor. Such factors according to Reinhardt (2006) have their own way of producing unemployment. So what is unemployment in the first place? Going by Weiner (2008) description of the term, he says that it is a percentage of the number of people that are considered to belong in the labor force but cannot find employment.
This brings to our attention the fact that students and the aged are not considered as part of the labor force hence they are not included among the unemployed. Another definition favored by the Keynesian school of thought is that “unemployment is an excess supply of labor resulting from a failure of coordination in the market economy” Classical economists on the other hand define unemployment as “people engaged in the productive work of looking for a better match between worker and employer”. They therefore view the search for work as work in it self. Thus we can deduce that the unemployed are workers working the “job search sector”
Unemployment is considered only a problem in the economy when it exceeds the recommended level of 4%. This level is encouraged as full employment in this case 0% unemployment, production will be impossible. Weiner (2008) the recommended 4% is only to cushion the labor market form unprecedented wage hikes resulting from high demand and low supply. In such situations employers are forced to increase wages to attract more workers in their firms thereby raising production costs in the short run. Again, workers will have more money to spend as result increasing the general demand as there will be increased disposable income in the short run.
In the long run, the situation will lead to a crisis as the process will be cyclical. Workers will increase wages and thus have more disposable income to spend. Firms will thus increase output to meet demand and prices of their products as production costs shall have also increased to meet the high salary wages. According to the Bureau of Labor Statistics unemployment in the US stood at 6. 5% as of October this year. This is posed to continue with economic situation in the country not that promising. Then we may ask ourselves what is the role of government in reducing the unemployment levels in the country.
There are two major ways through which a government can influence the performance of the economy not only in growth but also in solving some of these macroeconomic problems. In this year alone, the Bush administration has been lowering interest rates to encourage more investment and borrowing. This was a result reported drastic drop in consumer spending since late 2007. Due to the expanse of unemployment in reaching many people, economists have sought to clarify some issues pertaining o unemployment as a macroeconomic problem.
These clarifications are in the form classifying unemployment into subgroups and identifying bias to unemployment. Bias occurs in form of Discouraged Workers and unwilling workers as Reinhardt (2006), calls them. According to the same author discouraged workers are people who are keen to work at the going earnings, but have given up their job search, for the reason that they do not expect to find a job or there seems to be no hope. They are not registered for unemployment reimbursement such as the social security fund because they have remained unemployed for too long to be eligible (under American law).
Basically these people are unemployed but they are not represented in data as unemployed. Unwilling workers These are people who will never find anything job position good enough for them They retain the word unemployed technically to obtain compensation in terms of unemployment benefits. These type of workers are more common in European countries where unemployment benefits are higher than in the US. These persons count towards the unemployed though in actual sense they are not willing to be part of the labor force (Weiner, 2008)
Types of unemployment • Frictional unemployment. Cyclical unemployment. • Structural unemployment Cyclical unemployment in particular is defined as excess supply of labor. On the other hand frictional employment is caused by some people being between jobs while structural unemployment is caused by problems that arise because of a mismatch between the needs of employers and the skills and training of the labor force. Economic stagnation Data from the Federal Bureau of Statistics shows that per capita income in the US and growth in GDP has been on a steady increase in the last 20 years with GDP growth averaging 1. 8%.
Unfortunately, this growth is not well represented among the low income earning population. A report by the IMF released by BBC early last year shows that difference in income between the rich and the poor is highest in developed countries contrary to popular belief that it is highest in developing and less developed countries. The US, as the most developed country does not show its reported economic growth among the low income earners despite the continued growth in the economy. Weiner (2008) says, this points to the inefficiency of the GDP as a measure of economic performance/growth.
He makes an example of the buying and reselling of houses at an ever increasing price as being counted towards economic growth. Economist have for along time relied on GDP as the most all-inclusive measure of growth in an economy. With the economic situation Inflation Inflation is defined by Reinhardt (2006),as the general increase in price levels. According to the Federal Bureau of Statistics, the US economy had registered an inflation level of 6. 5% in the month of October. This translates to say that while prices have remained constant, product prices have increased by 6. 5%.
Therefore the common American citizen has the same number of dollars to spend with on expensive products. This now points to the difference in nominal and real wages. While there maybe nominal increases of wages by employers to offset the inflation impact, the increase might not be enough to cover for inflation. Therefore, when nominal wage is adjusted to inflation levels we get real increase in wages. When households receive real increase in wage, consumption is bound to go up. Types of inflation Economist agree on three types of inflation namely as • Demand pull inflation • Cost push inflation • Hyperinflation
When demand increases and this results in inflation, we describe it as demand pull inflation. On the other hand, when cost increases and this causes supply to decrease in turn, and this result in inflation, we describe it as cost push inflation. But these two different causes of inflation are not independent, of course. Demand-pull pull inflation will more often than not lead to cost push inflation. Continued inflation in the two categories creates hyperinflation. This is usually inflation in excess that may occur during crisis such as war. According to Reinhardt (2006), inflation as a macroeconomic problem has the following effects. It creates uncertainty; in that people do not know what the money they earn today will buy tomorrow hence they either shelve spending or induce excessive spending.
• Uncertainty, in turn, discourages productive activity, saving and investing. • Inflation reduces the competitiveness of the country in international trade. If this is not offset by a devaluation of the national currency against other currencies, it makes the country’s exports less attractive, and makes imports into the country more attractive, which in turn tends to create unbalance in trade. Inflation is a hidden tax on “nominal balances. ” Reinhardt (2006), says this is most apparent where investors hold their investments in terms of bonds and bank accounts. In case the currency loses value when price level rises, their investments lose the value. • The inflation tax is impulsive. • As the purchasing power of the domestic currency becomes less predictable, people resort to other means to carry out their business, means which use up resources and are inefficient thereby leading to the slowing of the economy in the long run.
These inconveniences might be reason enough to call for a stable price level. If it doesn’t matter Current situation vs. the great depression of the 1930’s Understanding the great depression of the 1930’s is like the Holy Grail of macroeconomics, so says Bernanke as quoted by Reinhardt (2006),This has been the worst financial crisis to hit the world and the US. The current situation as earlier said is being compared to the Great Depression.
But the thing is, we are not yet there but we might be headed there if the government does not institute policies that will deliver the economy from the eminent danger. The Great Depression is said to have been caused by the Stock Market crash of 1929 in the US, but the other way that some authors see it as the crash having resulted from the depression having began earlier that the agreed time of 1930 Reinhardt (2006),In the current situation, the financial and stocks market are in grave danger with multi billion companies reporting billions of losses and others filing for bankruptcy.
Though the Stocks market crash of 1929 happened in one day, the effects are expected to be the same with gradual crash as it is happening now. During this 1930’s depression, unemployment levels in the US had escalated to over 30% with hundred of firms closing down. The program introduced by the Bush administration of bailing out troubled financial firms is seen as set to avert the collapse of these firms which could largely add to the unemployment figures.
With the gap between the rich and the poor on the increase globally, some are viewing this as a balancing act by nature to help in bridging the gap by bringing down the big investors (Weiner, 2008). The same idea is drawing support from conventional wisdom which states that the “Great Depression helped produce a more equal income distribution globally”.
Examining this conventional wisdom, we find that the data does not support it and neither does there seem to be any signs of equating income distribution if the rumored recession turns out true. Conclusion The fact that the US economy has reportedly been on a growth path and the life of the ordinary American citizen has been worsening calls for urgent measure to evaluate the current system of measuring national economic output in terms of GDP as an indicator of the general economic position of a region.
As earlier said disparity in wealth distribution is highest in countries reported of having the highest levels of GDP. In conclusion therefore, the current method of using GDP as a measure of growth could be wrong is saying that the US economy. If other more competent measures were used, then it could be revealed that the US economy is worse-off than probably imagined and already in a bad recession.