The Fiscal and Monetary Policy and Economic Fluctuations

The Fiscal and Monetary Policy and Economic Fluctuations

Economic Status in the United States: Five Year Overview

The United States has experienced serious economic hardships over the course of the last five years between the years of 2008 and 2013. The country uses the gross domestic product (GDP) to measure the overall health of the economy. The GDP is indicative of the monetary value that is associated with the total amount of goods and services that are produced in any given year (Koba, 2013). As a result, the GDP is representative of the economy’s overall health. According to Young (2013),

Even if 2008 (-0.3%) and 2009’s (-3.1%) negative annual GDP percentages are dropped (something undone for the other periods) and only the 2010-13 period is averaged, the result is just 1.95% – still over a full percentage point below the previous decade’s.

This is cause for concern because Koba (2013) has said negative GDP figures result in higher unemployment rates caused by excessive layoffs. In like manner, it means that businesses lose profits because consumers are not spending as much as usual due to a lack of income that has resulted from unemployment.

Sterk (2013) posits that the current economic situation in the United States is the worst it has been in the last 70 years. This was clearly seen by the Federal Reserve who took measures to cut the interest rates down from 7% on June 30, 2008 to 5% in through June 30, 2014 (North Carolina Department of the Treasury, 2014). This is because of the high level of unemployment that exists due to a steady decline in the U.S. economy. For example, the unemployment level reached 9.5% in 2009 just as the recession ended. Nonetheless, the number of unemployed people ran into the millions. As a result, President Obama urged Congress to agree to and pass an economic stimulus package that was geared towards jumpstarting business activity that serves to employ people and lessen the unemployment rolls. The stimulus was passed; however, unemployment increased to 10% instead of decreasing which was the underlying goal.

A major determiner of unemployment is the loss of jobs due to business closures caused by the weak economy. When this occurred, millions of American workers lost their jobs. However, another factor regards employer hiring practices. In 2013, 13 million people started new jobs while in 2007, the number of new hires were 15.3 million. As such, employers are currently hiring fewer workers than they did five years ago and this is why unemployment levels remain high.

Inflation pertains to the increase in the price that consumers pay for goods and services. According to Schenpf (2013),

The situation of sharply rising prices came to a sudden halt in late 2008 when the financial crisis led to a severe global economic recession. Annual food price inflation dropped to 1.8% in 2009 and 0.8% in 2010, driven by the global financial crisis and its aftermath. In 2011, improving U.S. and global economic conditions led to a 3.7% rise in average food prices. However, by mid-2011 through 2013, food price inflation leveled off—due in part to continued sluggish economic growth, stagnant wages, and persistently high unemployment, which combined to weaken consumer purchasing power. The U.S. Department of Agriculture (USDA) projects that annual U.S. food price inflation will be in the 2.5% to 3.5% range in 2012 and from 3% to 4% in 2013.

This means that the food inflation and the state of the economy are inversely proportional; food prices rise when the state of the economy declines while they tend to be lower when the economy is healthy.

The Pew Research Center (2013) has said that the economic downfall between 2008 and 2013 was the most devastating. As a consequence, a survey has determined that at least 63% of the people polled believe that the overall condition of the economy is just as bad now as it was five years ago. On the other hand, 33% of the people that responded to the survey believe that the economic system in the United States is just as equally secure in 2013 as it was in 2008. As such consumer confidence is low.

Economic Indicators

The unemployment rate appears to have increased over the five year period between 2008 and 2013 (The National Conference of State Legislatures, 2014). This is because there were 2.3 million fewer jobs added in 2013 than were added in 2008. Moreover, the inflation rate for food was 2.9% in 2009 and it increased to a figure in between 3% and 4% in 2103. This is because the economy continued to be sluggish and there was only a slight sign of growth. Schnepf (2013) has the state of the economy and inflation rates are not directly proportional but they are inversely proportional instead. This means that food prices will rise when the state of the economy decreases. The North Carolina Department of Revenue (2014) has said that between January 1, 2008 through June 30, 3008, the interest rate was 7%. However, that changed on July 1, 2008 and that percentage dropped to 5% and held steady until June 30, 2014. This is because the Federal Reserve cut the interest rates to generate business growth and to increase spending.

Fiscal and Monetary Policies and Impact on Their Unemployment, Inflation and Interest Rates

One example of a fiscal policy is the stimulus package designed by President Obama in 2009. This policy developed a stimulus package that was created to put extra money into the taxpayer’s pockets to increase spending. Schenpf (2013) has said that higher spending will decrease the inflation rate of food because as people spend more, the cost of food goes down. Once the stimulus money is received, it becomes discretionary income and businesses begin to see a growth in their profits which means they could hire more people. In turn, this lessens the unemployment rolls (Sterk, 2013). In addition, the government has the ability to implement automatic stabilizers which implements higher tax structures for those with higher incomes. In addition, unemployment benefits and social programs are designed to help those with lower incomes are implemented to assist with the basic costs associated with living while the economy seeks to fully recover for all citizens (Horton & El-Ganainy, 2012). Finally, the interest rates are lowered to stimulate the economy which means that people are willing to spend more because the overall costs of products and services have decreased. As such, this methodology increases consumer confidence (Horton, M., & El-Ganainy, 2012). However, an increase in government intervention through stimulus spending does not drive interest rates up because doing so would be detrimental to the economy; consumers spend less when interest rates are higher (Horton, M., & El-Ganainy, 2012).

References

Horton, M., & El-Ganainy, A. (2012). Fiscal policy: Taking and giving away. Retrieved from http://www.imf.org/external/pubs/ft/fandd/basics/fiscpol.htm

Koba, M. (2011). Gross domestic product: CNBC explains. Retrieved from http://www.cnbc.com/id/44505017

National Conference of State Legislatures. (2014). National employment monthly update. Retrieved from http://www.ncsl.org/research/labor-and-employment/national-employment-monthly-update.aspx

North Carolina Department of the Revenue. (2014). Interest rates. http://www.dornc.com/taxes/rate.html

Pew Research Center. (2013). Five years after market crash, U.S. economy seen as ‘no more secure’ Retrieved from http://www.people-press.org/2013/09/12/five-years-after-market-crash-u-s-economy-seen-as-no-more-secure/2/

Schenpf, (2013). Consumers and inflation. Retrieved from http://fas.org/sgp/crs/misc/R40545.pdf

Sterk, J. (2013). Not looking for work: Why labor force participation has fallen during the recession. Retrieved from http://www.heritage.org/research/reports/2013/09/not-looking-for-work-why-labor-force-participation-has-fallen-during-the-recession

Young, J.T. (2013). The worst four years of GDP growth in history” Yes we should be worried. Retrieved from http://www.forbes.com/sites/realspin/2013/04/12/the-worst-four-years-of-gdp-growth-in-history-yes-we-should-be-worried/