Macroeconomic analysis is a crucial process that generates reliable information, which relates to the economic performance of a country. It concerns the movements, changes, activities, and processes that affect the general outlook of the economy. The analysis brings into perspective the vital components of economic performance. It is, therefore, important to understand the implication of the factors in various dimensions. Such an approach enables people to understand the macroeconomic situation in the country such as the United States.
The Current Macroeconomic Situation in the United States
Currently, the American economy exhibits conditions of underperformance. The recovery from the recession of 2007-2009 is not as promising as expected. The gap between the real GDP and the pre-recession trend continues to exist despite the measures taken by the government to revamp the economy. The current unemployment rate does not correspond to the population growth in the country. Nonetheless, the decline in the rate of unemployment does not emanate from the creation of new job opportunities, but from the high number of people leaving the labor market. The performance of the economy continues to deteriorate even though the current inflation rate is two percent less than the federal’s inflation standard. The inflation rate in America for the past two decades stood at 2.3%, which is lower than the current rate of 3.3%. The amount of commodities that American citizens can buy with the dollar continues to decline. The current consumer prices amount to 1.8% and are likely to increase in the next twelve months.
While the current tax increase targets the rich, the payroll tax cut for the middle class raises the tax burden for the group instead of reducing it. Additionally, the approaching sequester and the debt ceiling implies that the government will increase the tax revenues and reduce the spending. A tax increase will not only affect the rich but also influence the typical citizens. The subject of household debt remains another area of concern in the American economy. The credit card debt stands at 16.5%, which is the value registered at the end of 2009.
Budget issues dominate the list of factors that may impede faster economic growth. The budget deficit stood at more than one trillion dollars last year, despite the fiscal cliff program meant to reduce the amount of the annual deficit. The current deficit stems from the underperformance of the weak economy. It could have been possible to reduce the amount of the economy recorded a growth of more than 3% annually. What exacerbates the situation is that the deficit needs more than more $ 300 billion per year for its reduction. Consequently, reduced spending and increased taxes will slow economic growth. The condition requires the government to take appropriate policy measures.
How to Transform Aggregate Demand to Stimulate the Economy
Aggregate demand is a factor that depends on the level of economic consumption and production. The government can stimulate aggregate demand through appropriate fiscal and monetary policies. For example, the fiscal policy as a regulatory mechanism accommodates the changes in government expenditure and taxes to influence economic performance. The interplay between taxes and disposable income informs about the actions taken by the government to institute fiscal policies in order to stimulate the aggregate demand. The GDP comprises of consumption, taxes, and the level of disposable income. The relationship between the components of the GDP is as follows: GDP = C(Y - T) + I(r) + G + NX
The above formula highlights the relationship between the various elements of the GDP. C represents consumption. Y represents income, T stands for taxes, and (Y-T) represents the level of income. G stands for government expenditure while NX represents the difference between exports and imports in the economy. Based on the formula, the federal fiscal policy to reduce the level of taxes will cause an increase in the level of disposable income. The change will subsequently raise the level of consumption. Federal fiscal policy influences government expenditure, which in turn affects the GDP growth. For example, during a recession, a combination of increased government spending and tax cuts stimulate economic activity. This practice was evident during the 2001 recession when the federal government responded to the problem with immense tax cuts and more government spending. The government increased its expenditure by more than thirteen percent. The fiscal stimulus initiated by the government in 2002 resulted in GDP growth of more than six percent in the following year.
Apart from fiscal policies, the government can stimulate aggregate demand through monetary policy. The entity can regulate interest rates and the level of investment in the economy. Consequently, a change in the interest rate affects other factors of the GDP such as consumption and level of domestic expenditure. Low interest boosts the level of consumer purchases as well as the production of goods that will counter the increasing demand. The buyers in the country have more disposable income when the interest rates are low. Conversely, high interests reduce the level of investment and expenditures. The number of disposable income declines due to consumers.
Measures Taken to Combat Economic Slowdown
The current measures taken by the government emphasize expansionary initiatives. The government intends to reduce the interest rates in order to boost those of economic growth. The approach aims at increasing the rate of investment and the amount of disposable income of the consumers. It is a policy that enables the federal government to increase the supply of money in the economy. This initiative is in tandem with the suppositions raised by John Keynes. His ideas occupy an important position in the history of American economic recovery. For example, during the Great Depression of 1930, President Franklin Roosevelt adopted the policies, which enabled the country to convalesce from the problem.
The adoption of Keynes's theories in the management of economic recessions is based on the ideas postulated by the theorist. According to Keynes, economic recessions affect the spending behavior of the public. He asserts that members of the public spend less during such periods. Subsequently, the condition affects the rate of production, investment, demand, and causes more layoffs. Keynes adds that the government can avert the situation by enhancing the level of expenditure. This must come in the form of construction projects and government-funded programs. For example, expenditure on construction of roads, bridges, hospitals, and other public projects increases the number of funds the government spends on various commodities.
The theorist took a stance that deviated from the suppositions raised by the proponents of the classical economic theorists. Keynes does not contend to the view that free markets influence full employment. Instead, the theorist asserts that the level of economic activity in the country is contingent on the changes in aggregate demand. In this view, if the demand declines, the economy will experience a recession and unemployment. Keynes further criticizes the classical economists for failing to consider the changes in the demand that directly influence the overall economic performance. America is a country that subscribes to Keynes's ideologies of expansionary approaches to economic recovery and growth. The only President, who did not use the ideas, was Ronald Reagan. However, President Bush applied the principles to combat the economic recession of 2001. His strategies ensured full recovery in 2003 and subsequent economic growth. This initiative enabled the federal government to increase the level of spending and boost aggregate demand. President Obama is currently following the same principle, even though his strategies do not improve the results.
Under the current economic situation, Keynes would advise the American government to invest in public projects. The federal government would spend more on the construction of roads, improvement of the electric grid, development of alternative sources of energy, construction of dams and bridges. According to Keynes, the workers would welcome the idea of low wages due to the low demand of the labor force. He also posits that if the amount of money saved in the economy is more than the invested one, the rate of unemployment will increase. The theorist asserts that the money hoarded by corporate regarding savings can support tax breaks and investments if the organizations put the funds into use. He believes that countries should not operate on large deficits or trade surpluses. Keynes would support initiatives taken by the government to enhance the value of exports by reducing the total value of the American dollar. The approach would provide the best competitive edge for American companies and ensure a decline in the number of trade deficits.
Criticism of Deficit Spending
Notwithstanding the widespread notions that deficit spending influences economic growth through full employment and enhanced demand, the critics of the concept assert the policy has little effect on the level of output and employment. Moreover, they propound the idea that deficit spending only promotes the redistribution or transfer resources from one sector of the economy to another. This point raises the argument of whether deficit spending can produce economic effects that can benefit the economy at large without some form of discrimination. The theorists, who subscribe to the view, criticize Keynes’ approach to the concept of economic growth. The contenders postulate that it is difficult for the government to separate the short and long-term benefits of the expenditure. For example, the government may find it politically expedient to promote tax cuts for certain segments of the economy. Political objectives may influence government spending at the expense of economic intentions. The assessment of every government policy towards deficit spending must focus on the economic objectives and not on the political requirements.
Policymakers should ensure that deficit spending initiatives are in tandem with the economic needs of the country. This will promote the effective use of the funds for the right objectives. Additionally, policy measures should focus on the general aspects of the economy to boost the benefits of the program. The benefits of deficit spending should emanate from stabilizing the total output in accordance with the rate of unemployment. Consequently, the policy would ensure long-term employment and aggregate demand. Deficit spending is the best economic policy if the federal government pursues it with the right objectives.