Economy Doing? The State of the Global

¶ … Economy Doing?

The state of the global economy has been an issue at the forefront of discussion and debate for the last several years. In his 2011 State of the Union Address, President Barack Obama urged bipartisan cooperation for the continued economic revival of the nation, which drives the economic recovery of the world. The President promised increased spending on education, technology, transportation and research, all of which should strengthen the economy by making the U.S. A stronger competitor in the global marketplace. He also promised to slash spending and reduce the deficit, although the specifics of these cuts were not detailed in his speech (Benac, Kuhnhenn, Werner & Superville, 2011). Various economic indicators support the claim of the President, and economists that the economy has improved since its devastating crash in 2008. Yet, full recovery may still be years away.

Tanneeru (2009) noted that was debate about when and where the current fiscal crisis began. Many experts attribute the housing bubble which occurred at the beginning of the millenium's first decade. A study by the Brookings Institute (cited in Tanneeru) reported that from the mid-1990s to 2005, home prices surged well above gains in household incomes. The Federal Reserve Board had slashed interest rates post-9/11, partly to offset the economic downturn of the period 2000-2001 and partly to restore the economy and faith in the country in the wake of the terrorist attacks. With interest rates at such low levels, more people were able to buy homes. Residential real estate traditionally had been a solid investment, considered safe and with a high rate of return that outpaced other forms of investment. On the global front, investors were looking for ways to further increase their wealth. According to economist Peter Rodriguez, "Mortgage-backed securities… made it easier to move the investors' funds into the housing market, which fed the extraordinary price spiral" (cited in Tanneeru).

Brown & Lundblad (2009) acknowledged the housing bubble contributed significantly to the current crisis but cited other larger, underlying issues. "The fluctuation across real estate markets over the last decade or so simply reflect sizable macroeconomic imbalances" (p. 42). They cited the root cause of the crisis is excessive consumption combined with low rates of savings and high levels of debt.

Prakash Kannan, an economist at the International Monetary Fund (IMF) noted that recessions following financial crises, such as the recent one, tended to be characterized by slower growth compared to normal cyclical recessions (The Economist, 2010). Businesses and individuals are skittish about incurring more debt; lenders, for their part, have been increasingly reluctant to extend credit. It is difficult to determine precisely which of these factors if the cause and which is the effect, but the net result is that money is tight, which is not good for economic recovery and growth.

Reinhart & Reinhart (cited in The Economist, 2010) reported that historical record suggests an average of seven years for households and businesses to restore their debts and debt service back to levels that are comfortably proportionate to income. Progress has been the fastest in the United States, where the economy is often called "recovering" but not "recovered." For other economies in the world, the process had, at least as of 2010, not begun.

The current economic crisis has had some positive effects. The Credit Card Act of 2009 was designed to provide consumers with more protection against many of the abusive practices that were long-time standards for the credit card industry. Consumer Reports (2010, p. 13) noted 23% of respondents to its survey reported the new law and its mandated Minimum Payment Warning spurred them to pay off debt more rapidly. Less consumer debt is good for the overall economy. It is a small step, but a step forward.

Brown and Lundblad (2009) pointed out that real and lasting recovery will come from legislative changes as well as changed attitudes, down to the level of the individual. "Steps forward should focus on facilitating a greater balance to the economy, spanning the household, government and external sectors" (p. 49). No one -- individuals, businesses or the government -- can continue to spend beyond their means. Brown and Lundblad predicted in 2009 that unemployment would remain high, declining slowly over an extended period as skills of the labor force adapted to 21st century needs. They predicted inflation would stay low in the short-term but rise in the long-term as a result of the economic stimulus package, designed by the Obama administration to provide a major influx of money over a relatively short period of time.

As of March 11, 2011, 92% of funds from The American Recovery and Reinvestment Act of 2009 (the so-named "stimulus package") had been made available. From the $787 billion package, over 90% were for tax benefits, with the rest of the money divided among contracts, grants, loans and entitlements. The stimulus package created jobs and helped put more money in the pockets of consumers; both factors lead to increased consumer spending, which plays a significant role in boosting the economy.