The most widely accepted fact is that the American economy is gradually recovering from the recent global recession though the progress seems to be very slow and relatively disappointing. This disappointing growth is partly attributed to the widespread assumption that long-term economic projections are deteriorating across the globe. Some of the major incidents that have characterized the economies of many countries include huge unemployment rates, budget cuts in private and public sectors, and increase in debts. Furthermore, political systems and structures in various countries seem unable to deal with these problems that pose significant threats to the entire global financial system (Sivy par, 1). One of the major ways for understanding the status and future of the economy is through learning macroeconomics. Learning macroeconomics is important since without these concepts, it would be nearly impossible to understand the effect of development in business, society, and the global economy.
Overview of the U.S. Economy:
As the whole global financial system faces major threats because of the deterioration of long-term economic prospects, the American economy is among economies that ate deeply troubles. Some of the major issues that characterize the U.S. economy include enormous deficits and ineffectiveness of checks and balances of the political system. Actually, the United States not only experiences huge political issues but also faces a downward spiral of its financial systems. Moreover, America faces ongoing weaknesses in the labor market and huge controversies regarding debt limit. These concerns are attributed to the present low economic growth and eve-increasing, unsustainable amount of debt. While these incidents highlight the dual problems in the current American economy, they are seemingly more important than policy discussions and official predictions on the economy.
The histories of economies recovering from extreme financial distress indicate that the rate of unemployment will be stuck at high levels for several years rather than quarters. In addition, there is a possibility of larger budget deficits in the future because of slow economic growth. Without any changes in government policies, the financial gap would go beyond $13 trillion over the next 10 years under a probable hard-log scenario.
One of the major factors that will continue to affect the status and future of the U.S. economy is the sluggish economic growth. For instance, the major obstacle in getting unemployed Americans back to work is the weak or sluggish growth after the recent global recession. Notably, recovery from financial distress seems to be frailer than recoveries attributed to other kinds of economic declines (Orszag, par, 4).
Possible Scenarios in the U.S. Economy over the Next Year:
The projection of the short-term path of America's economy consists of a relatively higher than normal uncertainties. This is mainly because of various factors including fragile state of global economy and uncertainties regarding financial policy. Furthermore, these uncertainties are likely to occur because of the unusual huge deterioration of households' and businesses' balance sheets and likely reduction of the economy's level of probable output. The impact of these uncertainties is evident in the fact that many economic forecasters were forced to progressively lessen their growth predictions in 2012 because of economic incidents, particularly in the labor market. Despite of these uncertainties, many economic forecasters expect America's economic recovery to continue at a slow pace. Some of the major scenarios likely to occur in the U.S. economy over the next year include:
Slight Decline in Unemployment Rate:
According to the Congressional Budget Office, there is a possibility of slight decline in the rate of unemployment, which is expected to remain above 71 / 2% over the next year ("The Budget and Economic Outlook," p.1). In addition to projecting that real GDP over the next year will progress to a range between 2.3 and 2.8%, the Fed's Open Market Committee predicted that unemployment rate will be between 7.3 and 7.5%. Based on various predictions and underlying economic factors, the probability of slight decline in unemployment rate in the U.S. economy is the most likely economic scenario that will happen with a probability of 60% chance.
While the estimated unemployment rates are still very high, many economic forecasts have stated that the slight decline in these rates is attributed to the gradual improvement of factors that drive the economy. This slight decline is also because progress in the United States labor market will take time though the country's economic growth is expected to increase to 3.25% during this period. Together with the Federal Reserve and other governmental institutions, the Congressional Budget Office predicted slight declines in unemployment rates because of expectations of growth that will lessen these rates significantly. The 75% chance of slight decline in jobless rates is also because the U.S. labor market is more flexible than those in other countries.
Decline in Federal Budget Deficit:
The U.S. economy will experience a decline in federal budget deficit over the next year similar to the reduction that occurred as a percentage of GDP in 2012. However, the likelihood of decline in the federal budget deficit is dependent on the probability of economic laws to remain the same. It's estimated that this deficit will decline to less than $1 trillion for the first time in the past five years and at 5.3% of Gross Domestic Product ("The Budget and Economic Outlook," p.1). The Congressional Budget Office continues to state that deficits will continue to decline to 2.4% of GDP by 2015 based on its baseline projections.
Despite of the decline in these deficits, federal debt held by the public is expected to remain historically high to the economy's size within the next 10 years. The decline in federal budget deficits is attributed to the expected increase in revenues more rapidly than spending under the existing economic policies. As compared to the past 40 years where deficits were 39% average, federal budget deficit will remain above 73% of Gross Domestic Product. The relatively high federal budget deficits would have severe negative consequences on the United States economy. For instance, when interest rates increase beyond normal levels, federal spending on interest payments would also increase significantly. Secondly, federal borrowing lessens national saving, lessens capital stock, and reduces wages. The third possible negative consequence of high federal budget deficits is that it enhances the risk of a financial crisis. Due to its dependence on maintenance of current economic laws, the likelihood of decline in federal budget deficits is 30%.
Increase in Federal Revenues:
Federal revenues are expected to increase over the next year by approximately 8% because of the probable rise in income as the economy grows slowly. The slight increase in federal revenues will be accompanied with a 1.9% increase in real GDP during the same period. However, the growth of future income will mainly be affected by the rising inequality to an extent that the rise in median real income will remain slower than those of average per-capita income (Gordon, p.17). During this period, tax revenues are expected to return to their conventional average levels of 18.5%. Notably, the federal spending under the existing economic policies is expected to account for nearly 36% of Gross Domestic Product.
Similar to other countries with independent currencies, the United States has an additional choice to monetize its debts through substituting a significant portion of outstanding debt with another kind of federal liability i.e. currency. Through the Federal Reserve, the United States could inflate the money supply resulting in the increase in the price inflation rate that would undervalue the principal of the outstanding public debt (Boccia, par, 20). This would in turn contribute to inflation, which would destabilize the private economy, increase real interest rates, and increased uncertainty. Nonetheless, the probability of increase in federal revenues to occur remains at 10% because of the underlying economic factors, especially the joblessness rate.