Introduction
Over the past decade, many tumultuous events have taken place within the United States. Over the past ten years, there has been a severe economic depression, a terrorist attack, a significant crunch of the U.S. stock markets, mass layoffs, and a meltdown of the housing sector. Unemployment rate climbed to an all time high of 10 percent for the first time since 1983 that followed the severe recession of 1980s (Fernald, 1999, p. 771).
Additionally, following the recent recession, labor and capital mobility have declined while poverty levels have increased. Nevertheless, by the beginning of 2010, the U.S. economy began to show signs of recovery with new job opportunities. However, the wages paid across many sectors are not satisfactory.
Normally, changes in the stock market indicators, labor mobility, and rise in people’s wealth are used in assessing the condition of the U.S. economy. In recent times, local economic development dominates the U.S. politics with many calling for the adoption of entrepreneurial strategies.
Currently, trends in development policies focus more on job creation and entrepreneurship than on the provision of public goods and social services (Sperling, 2008, p. 78).These strategies are in response to the rising levels of unemployment, poverty, and economic recession. The current trends and strategies within the United States lay more emphasis on the job and wealth creation.
The U.S. Financial Crisis
The current financial crisis in the United States can be attributed to two main factors: ineffective regulatory mechanism and global policies that influence liquidity. Prior to the crisis, the interest rates in the United States were relatively high. Other countries, like Japan or China, had zero interest rates and fixed exchange rates respectively.
This significantly affected liquidity resulting to the crisis. At the same time, the U.S. regulatory framework could not adequately protect the local financial markets from global forces. In other words, the past policy options involving incentives particularly the residential mortgage backed securities (RMBS) of 2004 (Moretti, 2004, p. 117) contributed to the financial crisis.
In 2004, three factors contributed significantly to the crisis. The first factor involves the establishment of the zero equity mortgages under the past regime (Koven, & Lyons, 2010, p. 89). These aimed at improving access to mortgages by low-income earners. Second, the high capital requirements by the regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), forced banks to offer low interest mortgages to low income earners.
Third, the investment banks were allowed to manage their own risks based on their capital reserves. Prior to 2004, stringent rules allowed for 1: 15 equity to debt ratio (Moretti, 2004, p. 121). However, under the new scheme, investment banks at liberty to implement a skewed ratio in order to generate more revenue.
The crisis in the mortgage sector eventually spread to include the U.S. money markets crippling the entire financial system of the U.S. and the U.K. financial systems as well. As a result, the money markets could not finance development or personal consumption leading to massive layoffs. Currently, it is increasingly difficult to raise funds for financing infrastructural development. Thus, common global trends focus on wealth creation.
Common Global Economic Trends
The slowdown in economic growth in developed economies has had significant impacts on the economies of other countries through financial and trade linkages. Before the recent economic recession and rise in terrorist threats, the leading world economies did not undertake to adopt a common macroeconomic policy to revive the world economy (Fernald, 1999, p. 784).
Additionally, in the short-term money markets, both financial and non-financial institutions employ all manner of measures to raise funds for financing their investments. This affected the inter bank markets. Consequently, currently, central banks globally have undertaken measures to increase liquidity of the inter bank markets. However, not much success has been achieved in the inter bank markets.
Currently, manufacturing companies have established an operating plan that takes into account many parameters to increase cash flow or liquidity and profit margins. Additionally, under Basel II, banks employ various internal mechanisms to assess their capital needs not only for the determination of the price risks in their operations but also, and more importantly, for the inter bank credit risks (Koven, & Lyons, 2010, p. 81).
Effective regulation, though intrusive, compels banks to act favorably to ensure economic. Regulators, often the central banks, normally implement policies that specifically promote financial market and macroeconomic banking stability.
Recent statistical figures show that the recovery of the U.S. economy is slow than earlier anticipated. The growth in the United States economy is attributed to increased consumer spending despite the sharp decline in household wealth resulting from a reduction in the equity value and increased unemployment rates.
Stimulus packages involving temporary tax cuts have also boosted household income (Sperling, 2008, p. 80). However, because the wages are still low, the savings are still low. Additionally, the declining mortgage rates have provided more resources for improved consumption.
In other industrialized nations such as European countries and Japan, various measures have been undertaken to protect the local economies from external shocks. In Europe, effective use of macroeconomic policies ensures the stability of disposable income and prevents external shocks.
Additionally, European bloc has implemented a fiscal plan that aims at maximizing the utilization of labor and capital. In Japan, the domestic investment and demand are low with the domestic demand growth rate being 1.2 per cent in the year 2000. Developing economies, on the other hand, remain relatively unaffected by the global economic downturn save for a decline in demand for their exports.
Economic Strategies within the United States
In the United States, increased monitoring and enforcement of high standards of transparency has been adopted. Because the financial sector is closely tied to the real U.S. economy, many policies implemented aim at improving the macroeconomic environment following the 2007 financial crisis. In 2007, financial institutions acted quickly to increase access to bank liquidity.
By December, the same year, a Federal reserve was established to increase coordination between the main central banks within the United States. Moreover, to contain the crisis, the central banks embraced unconventional monetary policies particularly with regard to lending rates.
In general, the U.S. strategic policies fundamentally revolve around two main priority areas: enhancing competition and ethical governance of financial markets and reviving economic growth on a long-term basis.
Corporate reports of 2008 show that there is a decline in R & D spending. A recent survey by the Aberdeen group established a decline in R & D spending and a reduction in investments particularly on innovations (Visdwanathan, 2010, p. 2). According to the report, over fifty percent of companies indicated the use of business information systems in 2008.
The report further indicates that 78 percent of companies focus on managing demand as opposed to investing in innovation (Visdwanathan, 2010, p. 7). Normally, fewer manufacturing firms enter into the market during recession times.
In response to this, the U.S. has provided a favorable environment for small and medium enterprises (SMEs) to fill this gap and create more employment opportunities. However, the output in small companies is much lower than in large firms. Consequently, the employee benefits are also low.
Additionally, the U.S. has put in place a stimulus package to put the country back to sustainable economic growth. In particular, the stimulus package targets innovation and the improvement of potential innovations in the various sectors of the economy. In this way, job creation and entrepreneurship can be enhanced.
Currently, the policies adopted aim at encouraging industrial renewal and removing obstacles to small-scale entrepreneurship. Mush efforts have been made to increase SMEs access to credit through bank recapitalization and improvement of the loan schemes for SMEs.
All these efforts aim at easing the liquidity constraints faced by small enterprises and thus encourage entrepreneurship. This will increase wealth, job creation in the long term, and help revive the economy.
Conclusion
The 2007 global downturn caused unprecedented collapse of financial markets on a global scale including the U.S. financial markets. Additionally, the unemployment rates rose sharply following massive layoffs, as firms were not profitable during the recession period.
A common trend in most countries is to revive the small-scale enterprises. In the United States, various strategies adopted include economic stimulus packages to stimulate innovation and removal of the liquidity constraints that SMEs face and increase access to credit.
In recession period, the large firms particularly manufacturing firms scale down their operations. However, small enterprises that the U.S. economic strategies target have the potential of creating new jobs to curb the high unemployment rates.
Reference List
Fernald, J. (1999). Roads to Prosperity? Assessing the Link between Public Capital and Prosperity. American Economic Review, 89 (3), 771−783.
Koven, S., & Lyons, T. (2010). Economic Development: Strategies for State and Local Practice. London: International City.
Moretti, E. (2004).Workers’ Education, Spillovers, and Productivity: Evidence From Plant-Level Production Functions. American Economic Review, 94 (3), 117−121.
Sperling, G. (2008). The Pro−Growth Progressive: An Economic Strategy for Shared Prosperity. New York: Simon & Schuster.
Visdwanathan, N. (2010). Sales and Operations Planning: Strategies For Managing Complexity within Global Supply Chains. Aberdeen Group, 2−7.