American government and Federal Reserve have done much in restructuring the economy by overcoming various challenges at different capacities. Major challenges have been linked to those in Silicon Valley which comprises of unbalanced trade, keeping edge in innovation and counteracting recession.
These problems and economic challenges could be solved through either private sector or government actions. The major challenge for the last few years was solving the problem of unemployment and bringing back the levels to normalcy. Records show that GDP growth within the fourth quarter of 2010 was analyzed to be between 3- 3.2% while the rate of national unemployment decreased to below 10% in the month of January 2010 (Romer, 2011, pp. 1-17).
These statistics indicates positive growth within the U.S. economy, this is because decline in the unemployment level shows that employment losses experienced in the year 2008 and 2009 have been well compensated for. However, current reports indicates that the real GDP still runs below the long-run trend level since it still trails by almost 5% margin.
Meaning that United States is operating below their productive capacity, this is what results into high unemployment levels since there is also continued shortfall demand. Compared to the year 2007 which marked the beginning recession, unemployment rate in some counties are stabilizing (Romer, 2011, pp. 1-17).
Low rate of employment represents one of the major set-backs within the economy of the U.S. it leads to destruction of families, businesses and federal budgets. This called for major changes ensuring that the recovery process is reinforced through private sector.
GDP Report indicates that there is increase in the level of consumer spending but less inventory investment. It is and indication that most firms have stagnated and therefore need to recapture their legal positions within the economy by stepping up production and employment rates (Romer, 2011, pp. 1-17).
The government have taken necessary measures in encouraging firms to make greater investments in equipment and software within the year 2011. This will help in the creation of jobs in the short run and productivity improvement in the long run. These actions could be boosted through incorporation of productive government policies.
However, the Federal Reserve’s policy of quantitative easing brought some sense of discomfort amongst investors since they thought the policy had potential contributions towards inflation. The results were contrary to the expectations of many since the inflation rates remained low, hence the federal reserve helped in reducing long-term interest rates which at the same time encouraged economic growth (Romer, 2011, pp. 1-17).
Some actions were passed during what is known as lame-duck session which has since proved of much help and substitute to original Recovery Act. The government’s decision to promote longer unemployment benefits and encourage cut on payroll tax are some of the good policies which encourages economic growth.
The recent call by the President on increasing government spending on investments presents one of the best policies for strategic economic growth. It means money would be spent in building infrastructure and reinforcing activities within learning institutions which would to creation of additional jobs. This means improving the lifestyles of the current generation for a better tomorrow (Romer, 2011, pp. 1-17).
The government of U.S. has got comprehensive plans on how they would deal with problems arising from the long-run budget (Congressional Budget Office, 2010). This presents another major economic challenge to the U.S. government. There is need to understand the nature of problem the country has concerning levels of deficit. Statistics shows that the current deficit stands at between 10-11% of GDP.
However, this could be attributed to recession and the kind of policies used to counter the move. Part of the large deficit could be attributed to aging work force and rising levels of health care costs, this is expected to increase rapidly over several years from now (US Department of the Treasury Office of Internal Affairs, 2011, pp. 4-5).
Long-run deficits would as well create misunderstandings between the government and the bond market concerning repayment ability. During the last two years the real GDP has increased by 2.8% especially from the last two quarters of 2009. The imports jumped slowing down the rate of inventory accumulation within the first half of the year 2010.
The real GDP growth rate increased further by 3.2% in 2010 owing to increased investment and improvement in consumer spending; this indicates a core role played by the government in support of private sector (US Department of the Treasury Office of Internal Affairs, 2011, p. 5; Acharya & Richardson, 2009).
Description and evaluation of the main macro economic policies used by the American Government and the U.S. Federal Reserve over the last two years
Recovery has been experienced over the year 2010 from the dangerous and deepest recession America has ever experienced after World War II. Statistics shows that America’s GDP increased by 2.8% over the four quarters between 2009 and 2011. This ensured addition of employment opportunities where more than one million workers were added to the private sector within the last one year.
Records shows that the level of unemployment reduced by 0.5% from 10.1 which was the level by the end of 2009. The level of economic advancement experienced over the last two years could be attributed to fiscal stimulus of the American Recovery and Reinvestment Act, plans stabilizing the financial sector and housing program initiatives by the government.
In the process of ensuring sustenance in recovery, tax relief Act was passed and signed by the president including Unemployment Insurance Reauthorization and Job Creation Act of 2010. This has made private developers to revise the current forecast for American GDP growth, expectations is high that GDP could grow by 3.3% within 2011 (US Department of the Treasury Office of Internal Affairs, 2011, p. 2-8)
The plan by the bipartisan fiscal commission which was drafted in December 2010, incorporated several sensible measures which could be used to strengthen cost restrictive positions of health reform act passed within the same year. There have been reports on appropriate ways through which increase in Social Security benefits could be reduced while offering coverage to low-income seniors and increasing revenues which would ensure the long-run payments are settled.
The plan proposed ways of reducing spending on defence and agricultural subsidies, and at the same time raise gas tax which ultimately would be used in paying for infrastructural development. Amongst the proposals included limiting tax deductions and exemptions for the benefits of tax code and at the same time lowers marginal tax rates (National Commission on Fiscal Responsibility and Reform, 2010).
There is need for extra exports capable of putting Americans back to normal working status. Increasing the level of exports could be used as one of the tools on encouraging economic recovery. Consumers within America have experienced major financial crisis over the recent years hence more unlikely to recapture their former ways of spending freely.
During this time the rate of saving fell tremendously, this has since experienced improvement of between 5 to 6%. This increase could be attributed to consumers’ ability of repaying off their debts and rebuilding their savings. The government has also resorted to changing their methods of taxation as well as free-spending (Good hart, 2010).
Signing of various trade agreements with countries such as South Korea, Columbia and Panama is of great value and leads to increased exports and imports. Control on the exchange rates by the U.S. government provides one of the key mechanisms required for balancing exports and imports. Currently, the U.S. government is getting so much concerned about the levels contributions by the private sector, construction, level of government debt and percentage of assets purchased by foreigners.
Less demand from foreigners makes the dollar to be moderately valued making American goods and services to be more competitive within the global markets. The exports remained higher and imports lower within the last two years contrary to previous years when the dollar was overvalued. Weakness of other currencies against the US dollar makes American consumers and firms purchase more goods from the specified countries.
This in turn makes consumers from respective countries to be reluctant in purchasing American goods and services. This has made the government to take necessary steps in pushing countries like China to appreciate their currency for the purposes of stimulating U.S. exports and import levels (Emmanuel, 2010).
American economic policies should focus towards influencing major changes within major economies like China. Regulation of market forces could help America in increasing demand for their investment goods. This could help in creation of employment opportunities and increase the output.
Federal Reserve serve the role of providing the required liquidity under the language of Federal Reserve act, this has led to improvement of seasonal funding linked with agricultural cycles. Further, federal policies has increased stabilization within credit markets and giving support to the gold standards. Federal Reserve opted to develop its lending activities to address the current financial crisis, this included policies addressing central bank liquidity, funding liquidity and liquidity within the market.
In 2010 Fed applied its emergency lending powers for the purposes of assisting individual institutions (Cecchetti and Piti, 2010, pp 29-42). Fed also played the mandate of maintaining stable prices as well as full employment; central bank policies have been used as influence interest rates as well as growth in money and credit facilities (Bordo & David, 2010).
Conclusion
The current economic situation of the U.S. is more of less than the expected standards. This is because of numerous challenges encountered along the way like reducing unemployment, long-run budget deficit, improving on export levels and ensuring balanced payment.
Despite the challenges, it is still important for the government and Federal Service to ensure restoration of American prosperity for the sake of posterity. Real GDP shows the size and value the U.S. economy in relation to other economies and best reflects the kind of living standards currently prevailing within America.
GDP could be determined through approaches which focus on the use of products, Income and the level of expenditure. Product approach presents the most common sum outputs contributing towards improved level of exports from every sector of the economy. Expenditure approach presents the total value of products as a function of people’s purchasing power.
According to economists, the kind of economy having high unemployment rate, monetary and fiscal policies always presents positive results in the process of leveling fluctuations. Inflation rates within U.S. is expressed as a percentage and calculated by subtracting previous year’s price index from the current year and then dividing the results by previous year’s index expressed as a percentage (Gorton, 2010).
Price index is also used for the purposes of deflating nominal income into exact income. Individual income of U.S. citizens may be reduced by the rate of inflation but the change cannot affect entire economical levels. Adjustment on consumer spending levels has been made possible in cases where inflation is anticipated. This has helped in reducing inflation pressure on American citizens. Those depending on fixed income groupings suffer loss owing to reduction of their real income which experiences low improvement with rise in prices.
The saving class also fall victim of unanticipated inflation since the rate of interest may at times not satisfy full coverage on inflation costs hence loss in purchasing power. The situation where resource prices rise unexpectedly is known as cost-push inflation and cause decrease in output per person and at the same time decline in employment rates. Interest rates represent the percentage at which the U.S. government is capable of repaying their national debts.
This determines the relationship between the government and the stock market. Most private organizations use interest rates to ascertain on their liquidity policies while individual citizens use it as means of improving their of standard of living. However, it has been the work of national governments or central banks to set interest rate levels.
Reference List
Acharya, V. & Richardson, M., 2009. Restoring Financial Stability: How to Repair a Failed System. NY: John Wiley & Sons.
Bordo, M. & David C. W., 2010. The promise and performance of the Federal Reserve As lender of last resort 1914-1933. Federal Reserve Bank of St. Louis report. Economic Survey Report, (10).
Cecchetti, S. G. & Piti D., 2010. Central Bank tools and Liquidity Shortages. Federal Reserve Bank of New York. Economic Policy Review, (8), pp 29-42.
Congressional Budget Office, 2010. The Long-Term Budget Outlook. Web.
Emmanuel, S., 2010. Striking It Richer: The Evolution of Top Incomes in the United States (Updated with 2008 Estimates). University of California; Berkeley.
Goodhart, C. A. E., 2010. The Changing Role of Central banks. BIS Working Papers, 326 (11).
Gorton, G. B., 2010. Slapped by the Invisible Hand: The Panic of 2007. New York: Oxford University Press.
National Commission on Fiscal Responsibility and Reform, 2010. The Moment of Truth [Online] Web.
Romer, D. C., 2011. Restoring American Prosperity: Challenges and Solutions. State of Valley Conference Report, (2), pp. 1-17.
U.S. Department of the Treasury, 2011. Report to Congress on International Economic And Exchange Rate Policies. Economic Survey Report, (1), pp 1-12.