Fiscal Policy in the United States

Introduction

This report is an assessment of the U.S fiscal policy, economic indicators, current state of the economy, the changes that have occurred over time that are responsible for the current state of the economy. It also highlights the different recommended initiatives to ameliorate the current situation. This paper is widely researched based on several literary resource materials including economic books, economic reviews and even the internet.

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Executive summary

There is a critical world economic concern that is threatening to evolve into a recession. The First world, Newly Industrialized Nations and Least Developed Countries experience this economic turmoil in equal measure. The U.S economy is of great concern due to the role it plays in the entire global economy. It has experienced severe fiscal indicators change leading to unprecedented economic melt down. These effects can be predetermined through particular economic indicators which have been used for a long time to predetermine the economic situation at any particular time. A fiscal indicator is a statistic or conclusive information about the economy about the state of the economy. These indicators are used as parameters by which economic performance and future economic predictions are made. They include income per capita, employment patterns, housing trends, consumer price index against rate of inflation, Gross Domestic Product, industrial production, retail supply /sales, stock/money market prices and flow of money in the market reports (Schumpeter, Joseph Alois, 1954).

Discussion

The term “Economics” originated from the French word “economie”meaning “management of a house hold” and was adopted from the Latin word “oeconomia” derived from a Greek word, “oikonomos”.This term separates into “oikos”meaning “house” and “nomos”meaning “managing” The term has therefore evolved over time to encompass a wider financial and resource spectrum to include the management of a country’ resources. (McConnell Brue,)

The U.S economy has experienced severe fiscal indicators leading to unprecedented economic melt down. However, these effects can be predetermined through particular indicators. A fiscal, business or economic indicator is a statistic or conclusive information about the economy. These indicators are used as parameters by which economic performance and future economic predictions are made. (Michael Moss and Geraldine Fabricant.2008). These indicators may include the different factors of operation of a given economy including reports on income per capita, economic reports like employment patterns, housing trends, consumer price index against rate of inflation, Gross Domestic Product, industrial production, retail supply /sales, stock/money market prices and flow of money in the market (Schumpeter, Joseph Alois, 1954).

Francois Quesnay (1694-14) a French physiocrat, likened economic activity to the functioning of the human body. He said money and goods symbolized what blood is to the body in a circular flow diagram. This circular flow chart was affected by changes in the flow and condition determined by indicators. Leading economic indicators are the index used to estimate and determine the future economic activity. The Conference Board, a non governmental organization determines the value of the index from the value of the ten principal variables to predict any adverse economic situations like recessions or depressions in a country. These ten components of the index include: Average applications for unemployment insurance, demand on consumer goods and materials, duration of delivery of ordered goods, New orders which are not related to defense, Number of residential building permits, the S&P 500 stock index, Inflation adjustments to the supply of money, the difference between the long and short interest rates, consumer feelings, average working hours of manufacturing sectors. These leading indicators will be explained to give possible reasons of the downward trend in economic performance.

Average applications for unemployment insurance is an indicator used to identify and record the total number of people from the academic institutions and those rendered jobless by different companies and therefore wish to be insured as an unemployed person.. It is a very effective indicator to the performance of an economy since it provides the direct effects of the reduced performance of the economy and other factors of economic progress. Unemployment provides a big challenge to the U., S because of the monthly increase in number of job cuts. The job cuts have increased at about 0.9% in one year from January 2007 to January 2008(230,650-232,616 respectively) and increased from 205,220-232,616 in a decade (998-2008) with the employment remaining at 146.2 million to unemployment at 7.6 million in January 2008.This trend still continues and may be very disastrous on the economic front if not tamed. (Government info.2008).

Demand of goods has been properly explained by Alfred Marshall (1824-1924) with the Law of Demand “The amount of goods demanded increases with the fall in price”. The Law of demand was based on the diminishing marginal utility and the income and substitution effects. This index is used to identify the level of consumption and demand of the goods. If a high demand on consumer goods and materials is experienced then the economy is doing well and vice versa is true. Demand depends on availability of money in the market and the necessity of the good. Disparity in consumer index drop to 0.3% and inflation rise to 0.8%, has led to careful consumer expenditure and consumers will most likely purchase essential goods, reduce on traveling and other unnecessary expenses.

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Pigou, British economist contributed immensely to the “aggregate demand-aggregate supply model (the “real balances effect”) Chapter 5, (McConnell’s “Origin of the Idea” to the theories of price discrimination by arguing that a more equal distribution of income would increase social welfare. This true in the American context where the is unequal distribution of resources hence affecting period of delivery of goods. When it takes longer to deliver the goods shows that there is a very high demand for the goods and probably a shortage is being experienced but when it takes shorter to deliver the goods it is an indication that there is very low demand for the goods.

New orders which are not related to defense. Increase in number of new orders rather than the defense department is an indication of growth. Numbers of residential building permits have reduced and the government has recorded a housing bust and growing number of home foreclosures rendering the mortgage industry model citizens into fiscal turmoil. The sector which experienced many home owners who made minimal monthly payments due to a decline in home prices by 50% will see the premium on the mortgage grow over time rather than reduce as normally is the case. Tighter conditions in housing market, reduced mortgage lending are examples of this crisis in the centre of a world economy. (Michael M. and Geraldine F, 2008). The S&P 500 stock index, monetary policy, interest rates, financial futures, currency exchange rates, Federal Reserve System, international economic policy, Statistical department reports and agencies and subsequent decline stock transactions are valid indications of the ailing economy.

Inflation adjustments to the supply of money. The American economy is the largest in the world totaling to US $13.13 trillion. It has been growing faster than the other economic tigers like Britain, Germany and Japan and the entire European Union. The U.S has managed twice as much in global output in the recent times, which is a sign of its fiscal capacity to wither hard economic times but not with ease. The country registers a per capita income of US $ 44,244.However the United States of America has experienced total personal income less transfer payments in the last one year which is a serious indication of a financial crisis. (The Conference Board, July 2008). The difference between the long and short interest rates has been greatly noticeable since Fed has started cutting interest rates and warning of recession. (National Federation of Independent Business.2001.)

The surveys done on American consumer sentiments are very volatile in nature and that the consumer confidence is inching up due to pre-holiday discounts and festive season discounts but while job outlook keeps down, but studies typically focused on ICS show that consumption of goods will increase in the early months of the next financial year, first on durable goods and later on both durable and non durable goods due to financial adjustments within the markets and house holds..Economic theories state that when consumers feel poor they tend to purchase less and vice versa. (FRBSF, Economic Letter, June 27th 2008)

Research done in America shows that American consumer market for homes, furniture and cabinets has split pitting optimistic American consumers against those who are not optimistic. Average working hours of manufacturing sectors have increased and industrial production, manufacturing, mining, electric and gas gadgets and trade in the same showing increased value added terms which have coincided with the past recessions hence an indicator to the present situation. Four index components including employment rate, production, real and real sales have had similar cyclical occurrences as compared with the past events of times of financial disasters in America’s history. (Samuelson, Paul A, et al.1983)

The GDP price index measures the price for al finished goods in the economy. America’s economy has been in recession for one year now. This downward trend began in September 2007 and slowly fluctuating from 4.8% to the present 0.3%.Projected economic indicators showed that higher borrowing and fuel costs will slow down the annual growth rate and some economic professionals have done to compare the economic crisis to past recessions and even depressions especially that of the 1930s.This analysis is done on modern business cycles and are clear indicators to the looming recession (American Economic Review, 2008)

The following economic indicators are up: Average applications for unemployment insurance due to massive job loses and increased non-farm employment, duration of delivery of ordered goods have become longer due to shortage and lack of finances to purchase the expensive goods, New orders which are not related to defense due to reduction in global military activity, Inflation adjustments to the supply of money including regular treasury statements, Government action on bail out plans for the wall street firms to avoid wall street failure, the difference between the long and short interest rates due to fiscal adjustments in the markets ,rising consumer sentiments due to financial frustrations and rising inflation, increase in the average working hours for the manufacturing employees to make more money through over time payments besides taking extra responsibility to the job cuts. However the following economic indicators are down: demand on consumer goods due to lack of funds to do the purchasing of the goods and longer duration of delivery due to shortage of funds to purchase the goods and materials duration of delivery of goods. (Economy in Historical perspective 2008).

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The American fiscal policies have been geared towards diverting a possible collapse of the world’s largest economy. These policies involve bailing out firms and banks in the Wall Street besides the mortgage firms. The past one year, since the beginning of the financial problems the government did not lend out to the banks but instead traded with the banks. (Handbook of Key economic indicators)

America’s economy has experienced several recessions and even economic slump periods and through the years it has used the given indicators to predict the future trends in the market and the entire economy. America’s economy has as well been driven by both the microeconomic and macroeconomic policies and regulations which in turn blended the two facets of the economy, the Main street and the Wall street have been very pertinent to the support of the World financial systems through their market capitalism policies and environmentally friendly industrial revolution through its major areas of production. Functionality of the fiscal markets to it advantage. The functionality and interdependence of the households and firms has been severely affected by trade, exchange, money and banking activities. The market demand has evolved into a symbiotic economic relationship for the parties involved. for example ,this happens whenever any transaction takes place due to the cost effects t and have equally been affected as the citizens and other residents of the U.S. This has led to near collapse or collapse and even sell outs of key banking firms due to the inflation. The banks in historical times and even to date have supported the American government but the vice versa happened in the wake of the recession fears. The banks as the mainstream fiscal granaries have to some extent failed to live the business slogan of being the models of business management. The banks gain in terms of huge interest on loans to the people and the market gains from the services of the bank including loans. This explains why voluntary exchange occurs whenever transactions have to be done. And also to avoid any further loss of money through the process of the transactions.

Demand and supply are fundamental factors in the operations of the economy. The demand, quantity of a product needed and the supply, the quantity a market can offer should be controlled by the careful and equitable allocation of resources. However, the law of demand confirms that “If all factors remain equal, the higher the price of a good, the less people will demand that good” This creates the need for economic stimulation. The law of supply indicates the quantity which can be sold at a particular price. It states that “The higher the price, the higher the quantity supplied”. At this point the resources and goods allocation is at its highest peak and the customers are satisfied by the service. Everybody in the market is happy with this situation. Basing my argument on this concept of supply and demand laws, I would like to say that the American government must have assumed certain parameters and indicators especially the allocation of the resources as the basis of the current market service deficit. (PlanWare, 2008)

All the stake holders in the economy play a vital and interdependent role in the circular flow models of the economy including exchange and passing on of cash from one party to the next. For example, the employers pay through the banks or cheques which gain revenue to the banks instantly. The employee withdraws the money pays mortgage firms, purchase house hold items from stores and supermarket which pay tax to the government and the money is used by the government for national budget and these projects involve purchase from the same firms which pay the taxes and pay the personnel who take it back into the chain floe through stores and banks. If the economy goes in recession banks hold bad debts and reduce news lending fronts. Business entrepreneurs are critical in the business prospect forecasting and they are cushioned mostly from economic inflation risks to some extent whereby any increase in financial difficulty is passed on to the consumer in the same measure. However, this inflation may reduce entrepreneur’s purchasing power and get them out of business.

Financial institutions also control the flow of finances through fiscal regulations in the sector including lending and rate of interest. Even though the rule of law is in effect as the financial difficulties are experienced, it would be worse without such market control measures including awards of contracts. This helps reduce corruption, ensure a controllable flow of finances, and ensure that quality of product and service is assured. It also ensures that the government collects revenue fir its operations. These regulations ensure that genuine business is done legally and to control export and export into the country. (Carter McNamara, 2008)

Fiscal policies can be used effectively to control recession since the government has to stimulate the low demand and get people purchasing so that the money can flow in the market. These policies include increased government spending or reduction in taxation for availability of disposable income in the market. Reduced taxation may however lead to government deficit leading to domestic borrowing which is a recipe for increased bank lending rates. These two measure shave worked elsewhere like in Japan during the recession of 1998-1999.However a bleak prospect in the fiscal markets may lead to reduced consumer spending and they may keep the money instead of spend it. (Econ Explore, 2008)

Conclusion

In conclusion, I would recommend the American government to reduce taxation and make the citizens and residents access more disposable income. The government should bail all the well performing financial institutions instead of its selective action on a few firms. The economy comprises both the macro and micro-business entities hence it should be more cautious. The American government should reducer spending abroad on new programs but instead support the ongoing programs in co-operation with the countries of operation. America’s global peace initiative trend should be revised and any attempts on global security at the expense of its own domestic economic performance should be carefully evaluated. However, America’s role in ensuring world peace is commendable, its approach should change and any attempts at world peace should be done through the standing forces and security personnel of the United Nations, European Union, and it should advocate for continental unions to curb threats of security or else it risks the fall in its economy.

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References

  1. Econ Explore, 2008. How can Fiscal policy help stabilize the economy.
  2. FRBSF, Economic Letter, 2008.Economic Research and Data.
  3. Government Info. 2008.
  4. Handbook of Key economic indicators. 2008.
  5. Michael Moss and Geraldine Fabricant. 2008. Once Trusted Mortgage pioneers now Pariahs. Web.
  6. Plan Ware, 2008. Making Cash flow forecasts.
  7. Samuelson, Paul A,et al.1983. Foundations of economic Analysis. Web.
  8. Schumpeter, Joseph Alois, 1954. Economic Analysis. Web.
  9. The Conference Board, 2008. Present Condition of the U.S Economy in Historical Perspective 2008.
  10. Victor Zamowitz, Senior fellow and economist counselor. The Conference Board, 2008.Present Condition of the U.S Economy in Historical perspective 2008.
  11. (McConnel Brue) Economics.
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