What Is Going on with the US Economy?

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Table of Contents

Introduction
Conclusion
References

Introduction

The US is largest and most critical economy in the world. According to EconomyWatch, during the year 2010, the US economy generated “20.218 percent of the global GDP (PPP), which was equivalent to US$ 14.624 trillion” (EconomyWatch, 2010). For the past decades, the US economy has led other economies. However, the world’s strongest economy is now facing serious challenges ever since the WW II.

These issues have resulted from both domestic and international environments. In the domestic sphere,” the financial crisis of 2008 exposed weaknesses in the US economy” (EconomyWatch, 2010). This was the worst crisis relative to other past crises, including the Great Depression. As a result, consumer confidence has remained low.

Evaluation of the forces underlying U.S. adaptability to changing economic forces

The US is the largest and most technologically advanced economy in the world. It has “a per capita GDP of $49,800” (ITA , 2013). The US economy is a market-oriented economy in which most critical decisions come from private people and business organizations. In addition, the US government (both federal and state) gets most of its services and good from private players in the market.

Since 1960s, the US economy has played a major role in absorption of global savings. As a result, it has remained “the most heavily invested in country in the world, with foreign direct investments at home worth $2.398 trillion in 2010” (EconomyWatch, 2010). The US is also the largest investor in “the world with investment worth $3.259 trillion abroad in 2010” (EconomyWatch, 2010).

The US economy depends on its great flexibility in decision-making, which has facilitated important decisions in expansion of industries, development of new services and products, and retrenchment of excess workforce among others. In the international sphere, the US industries have faced stiff barriers in their attempts to venture into other markets like China.

The US companies are in the front position in technological innovations. For instance, firms in the US produce “the best computers, medical, aerospace, and military equipment” (EconomyWatch, 2010). These firms have become highly specialized since the WW II for improved productivity.

The focus on technology has led to the growth of a two-tier labor market. In this case, workers at the bottom of the tier do not possess high-levels of technical skills, education, and professional required for technical jobs.

Over the last 200 years, the US foreign and global economic policies have changed in order to match emerging economic conditions. Before the Great Depression and WW II, the US government and business entities focused on developing the domestic economy.

However, the US has shifted its approach to accommodate the world economy by reducing trade barriers and providing flexible conditions from foreign firms. In fact, it has played important roles in WTO and GATT.

The US promotes free market economies. However, the government has remained a major player in the economy. The government must address issues that private firms have ignored, such as education, environment, and labor provisions.

The government must also create employment, protect the US firms from unfair competition, and nurture budding industries. This is evident in the agricultural sector where the government intervenes through subsidies.

One can note that the US economy is a mixed economy in which adaptability depends on “interactions among the private, public, and international sectors” (EconomyWatch, 2010).

Evaluation of the sources of U.S. productivity and growth in terms of how they apply to key factors of economic growth

Rapid economic growth in China has affected the US GDP and it will decrease to “18.361 percent by 2015” (EconomyWatch, 2010). Slow and modest economic growth shall persist for “the next five years as the country recovers from the 2008 financial meltdown” (EconomyWatch, 2010).

Economists concur that productivity is the main ingredient for a sustained economic growth and wages of a country. Kahn and Rich note that the US productivity data have not been good with regard to the long term-trend of the GDP (Kahn and Rich, 2011). The US productivity grew steadily in the 1990s and started to decline 2004.

One major source of the US productivity and growth is labor force, which is the best in the world (Amiti and Stiroh, 2007). However, the labor productivity in the US has declined. Though the rate of unemployment in the US shall decline, it would remain high at the rate of 6.807 by 2015.

The labor demand has shifted to highly skilled employees. Moreover, strong productivity in foreign countries may hurt the US economy by making it difficult to compete globally.

The US export market is likely to benefit from several trade agreements because of increased demand for its products. This shall result in rapid productivity and growth.

The confidence level of consumers has remained low due to fears of another economic downturn. However, this scenario has changed as the US economy recovers slowly.

The rate of inflation in the US has remained low. However, it will rise gradually to 1.859 percent in 2015. The interest rate has also remained low, but the current account deficit has declined to US$466 billion from US$802 billion in 2006. This will drop further in the future. The high deficit shows debt risks in the US, but it has an improved net capital inflows.

The government should address other factors of productivity and growth like high fuel prices, sub-prime mortgages, and low interest rates of the Federal Reserve because it weakens the US dollar.

Causes of the U.S. financial and economic crisis, the reforms undertaken, and their impacts to date

Several factors contributed to the US financial and economic crisis of 2008. The crisis emanated from the home mortgage market under the subprime mortgage arrangement. It spread to prime mortgage, the mainstream real estate sector, corporate junk bonds, and other kinds of debt available in the US economy (Moseley, 2009).

In short, the pursuit of profits led to the crisis. Consequently, the US banks suffered serious losses. This led to a quick reduction in lending because of further losses. In turn, a severe economic crisis hit the US economy (Cadieux, 2009).

The federal government acted quickly in order to avert a crisis by introducing short-term measures like bailouts of some financial institutions and other companies. The Congress also approved economic stimulus bill of $850 billion to facilitate economic recovery.

These counter measures restored investor confidence. The stimulus package increased “state aid, spending on education, unemployment benefits, public works infrastructure projects and one-third tax cuts” (Moseley, 2009). However, these were short-term interventions, which worked and led the economy to a recovery path.

Conclusion

The US economy is on the recovery path. However, some economists have warned of a possible economic downturn. The Federal government must do a lot to address the mortgage sector crisis, interest rates, high rates of unemployment, rising inflation, and other economic challenges on a long-term basis.

References

Amiti, M., and Stiroh, K. (2007). Is the United States Losing Its Productivity Advantage? Current Issues in Economics and Finance, 13(8), 1-7.

Cadieux, D. (2009). The US Economy, 2009. Ontario: Ivey Management Services.

EconomyWatch. (2010). Web.

ITA. (2013). The US Economy – overvie. Web.

Kahn, J., and Rich, R. (2011). The Productivity Slowdown Reaffirmed. Web.

Moseley, F. (2009). The U.S. economic crisis: Causes and solutions. International Socialist Review, 64, 1.

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