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United States Economy: Expansion or Recession? Research Paper

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Updated: Jul 15th, 2021

According to the key indicators, such as gross domestic product (GDP), unemployment rate, inflation rate, and interest rates, the US economy may be considered to be healthy. The GDP rate is expected to be between 2 and 3%, which is a normal value. Unemployment level continues to decrease at the natural rate, and there is not much inflation (1,9%). Based on the data presented in the table and graphs, one may conclude that real GDP rises and the unemployment falls, which allows for saying that the US economy is experiencing an expansion.

It should also be stated that the economy is above its potential values of GDP ($18,6 trillion compared to $16,7 trillion) and Unemployment (3,7% compared to 4,7%). In September 2018, the interest rate was 2,25% which is expected to increase to 2,5% in December 2018. In the given essay, policy recommendations aimed at maintaining economic growth are discussed.

For the current period of expansion to become the longest, the economy will have to continue growing in the next years. However, more economists are concerned with a growing federal debt relative to GDP. On the last fiscal day of 2018, the national debt rose above $21,5 trillion due to increased spending and tax cuts (Richter, 2018).

Even though Conservatives in Congress complain that spending mainly remains unchecked which will inevitably lead to an increase in federal debt, Trump and GOP leaders agreed to boost federal spending by $300 billion. Under the current law, the US government may borrow as much as it needs. Starting with March 1, 2019, the debt ceiling will prevent the government from borrowing above the level of debt on that date.

The current law on federal spending may not be considered satisfactory. Even if federal debt stops growing, it will displace private capital investment which may lead to negative consequences. Apart from that, if the US economy hits the financial crisis with debt accounting for more than one-third of GDP, economists and politicians will not have many options to choose from. Therefore, fiscal policy should be aimed at decreasing debt-to-GDP ratio. The recommendations presented below discuss what should be done in fiscal policy to decrease the federal debt.

The first recommendation is to increase federal investment in education, healthcare, and research and development. This would enable to create a great deal of new jobs (and thus reduce the level of unemployment) and strengthen the American education. Education grants may be given to facilitate teacher preparation and provide financial support to all students to afford higher education. One may note that cutting costs on federal spending is not a forward-looking policy, as it may reduce potential total output and income.

Apart from that, it should be highlighted that cutting federal spending in education will reduce the incomes of people who need particular support from the government. Also, taking into account significantly low Treasury interest rates, federal spending should be increased.

One may note that it is crucial to increase the return on federal spending as funding may be dissipated. This may be achieved by careful cost-benefit analysis and audit of government subsidies for innovative research projects in order to minimize government pending on unpromising startups. One may suggest that it is important to understand that some categories of federal spending are investments in future income. This is particularly true for benefits for lower-income families, such as healthcare benefits and housing subsidies.

These investments should be protected to increase future profits of some young people. This recommendation has been supported by the Center for American Progress (2015) that highlights the importance of investing in infrastructure, innovation, and national service to create jobs. It also states that middle- and low-class families should get affordable higher education and retirement.

The second piece of recommendation is that benefits for higher-income retirees should be reduced while benefits for working people and low-income retirees should not. One may foresee that in the next 20 years, spending for Medicare and Social Security will increase in relation to GDP. This may be explained by the gradual aging of the US population, which will lead to a growing number of beneficiaries. The crucial point is that an increase in government spending may be explained not by a general economic enhancing in the federal government but a significant increase in spending for Medicare and Social Security.

One may assume that over the last years, people have gained little from the economic growth, in particular, total output. Based on this evidence, the government should aim to raise incomes for people with modest means. Benefits in healthcare programs, such as Medicare and Social Security, should not be cut as this would result in insufficient retirement income for poor people. Therefore, one may state that benefits should be cut for high-income beneficiaries of Social Security and Medicare.

One the one hand, this recommendation has certain disadvantages, as transforming Social Security and Medicare would alleviate the connection between one’s taxes and benefits. One may also note that this may make high-income people work and save less. On the other hand, this approach may be of help in restraining federal debt without burdening low- and middle-income Americans. This recommendation has been supported by the American Enterprise Institute (2015) that proposed larger subsidies to be paid to beneficiaries who are in greater financial need or who have higher health risks. Therefore, reducing benefits for high-income retirees may be an important tool in enhancing the US economy.

The last recommendation is to raise tax revenue to sustain the US budget in the long term. It is obvious that there is no other possible way to considerably reduce the federal debt than to get more revenue by raising taxes. This recommendation may be supported by the fact that Republicans approved only a few bills on cutting government spending during several years that they controlled the House of Representatives. Therefore, raising tax revenue is still the most efficient way to get additional revenue.

There are two ways to start raising tax revenue, one of which is to tax carbon emissions, and another one is to broaden the tax base by reducing deductions and exemptions. Reduction of carbon emissions is approved by both experts on the climate and experts on the economy, though, for different reasons. It was a Republican lawmaker Carlos Curbelo who introduced a bill calling for a carbon tax (Milman, 2018). This would enable to control carbon emissions as well as get additional revenue. Economists state that if tax expenditures that provide financial assistance for certain activities and groups of people are reduced, the US economy will benefit from it. This is because canceling deductions and exemptions will allow for obtaining a considerable federal revenue from the business taxes.

To sum up, the current state of the US economy based on its key indicators has been analyzed, which allows for saying that the economy is experiencing expansion. Three fiscal policy recommendations aimed at maintaining the US economy and reducing the federal debt have been discussed, the supporting evidence for them has been provided. The recommendations include increasing federal investment, reducing benefits for higher-income retirees, and raising tax revenues.

Supporting Materials

Table 1. Key Economic Indicators.

Year Inflation Rate YOY Fed Funds Rate Business Cycle (GPD Growth)
2000 3,4 6,5 Expansion
2001 1,6 1,75 March Peak. November Trough
2002 2,4 1,25 Expansion
2003 1,9 1 Expansion
2004 3,3 2,25 Expansion
2005 3,4 4,25 Expansion
2006 2,4 5,25 Expansion
2007 4,1 4,25 December Peak
2008 0,1 0 Recession
2009 2,7 0 June Trough
2010 1,5 0 Expansion
2011 3 0 Expansion
2012 1,7 0 Expansion
2013 1,5 0 Expansion
2014 0,8 0 Expansion
2015 0,7 0,25 Expansion
2016 2,1 0,75 Expansion
2017 2,1 1,5 Expansion
2018 1,9 2
Unemployment Rate 2015-2018
Figure 1. Unemployment Rate 2015-2018.
Real Potential Gross Domestic Product.
Figure 2. Real Potential Gross Domestic Product.

References

American Enterprise Institute. (2015). . Web.

Center for American Progress. (2015). . Web.

Milman, O. (2018).. Web.

Richter, W. (2018). . Web.

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