The U.S. economy faces many challenges given the fact that it is recovering from a financial crisis. Virtually every sector of the economy was affected by the 2009 financial crisis. Economic growth slowed down while unemployment rates increased. It is important to note that these conditions have not changed much.
High rates of unemployment are still being reported in the U.S. During the financial crisis, the American economy shrunk and approximately 9 million jobs were lost. The unemployment rates have been alarming especially from 2009. The unemployment rate was 5% in 2008 but rose during the financial crisis to 10%. Though they have declined to around 7.8% as of 2012, much has to be done because the number of people unemployed is still high (Lewis, 2013).
It is paramount to note that despite the recovery that is being recorded in various sectors of the American economy, the figures are still very low compared to the drop that took place. On the same note, there are still the unpaid, and almost certainly impossible to pay, house mortgages which caused the 2009 financial crisis.
Similarly, the euro crisis is likely to spill over to other parts of the world and America’s financial system is at risk. On the same note, there is reduction in spending due to the cut in government expenditure which is slowing down economic growth. All these factors are raising eye brows among economists because they form a perfect recipe for another economic crisis (Krugman, 2012).
In conditions like the one America is in right now, choice of policy is quite vital to boost the economy. It has been stated that the economy is recovering but not as expected. In order to strengthen economic growth and job creation, private spending should be improved through increasing disposable income. To achieve this, expansionary monetary policy is essential.
The FOMC had reduced interest rates during the financial crisis to improve the public’s access to money. Maintaining the interest rates low will go a long way in ensuring ease access of credit and thus boost spending. On the same note, the FOMC can also buy more treasury bills to increase the amount of money in circulation (Lewis, 2013).
On the other hand, public spending will also be crucial in increasing aggregate consumption. Though the federal government has proposed tax cuts to increase disposable income as well as private spending, government expenditure is still low.
The policy that was implemented to reduce federal, state and local government spending is still in force (Lewis, 2013). To help the situation, the government needs to implement an expansionary fiscal policy that will not only encourage tax cuts, but also increased government spending at all levels.
Krugman, P. (2012, June 28). The Conscience of a Liberal. The New York Times. Retrieved from https://krugman.blogs.nytimes.com/2012/06/28/a-manifesto-for-economic-sense/
Lewis, P. (2013). Family and Business Tax Cut Certainty Act of 2012. Munchen: GRIN Verlag.