Current macroeconomic situation in the U.S.: inflation and recession concerns

¶ … macroeconomic situation is one of worrying about recession. Although GDP increased at an annualized rate of 5.7% in the fourth quarter of 2009 and 2.2% in the third quarter (BEA, 2010), the United States economy in general is still in a recovery phase. The economic growth of the last two quarters is a positive sign, but in order for the main situation to be one of fighting inflation, there would need to be further evidence of mounting inflation. That may happen at some point in this year, but at present there is little evidence to support a long-term inflation-fighting scenario.

There are a number of proposed prescriptions to fight the recession. Paul Krugman (2010) suggests that expansionary fiscal policy in the form of an increase in government spending is necessary to combat the recession. Other economists prescribe tax cuts as a means to boost spending by businesses and consumers. Both approaches have merit. Tax cuts are an expansionary fiscal policy that encourages capital flows out of savings and into the economy. In particular, they encourage such flows when businesses and consumers are sufficiently optimistic about the prospects of a strong economy in the near-term that they are encouraged to invest by the savings afforded them via tax cuts. While that was not the case for the past year, at this point, with two quarters of accelerating economic growth, tax cuts serve this purpose. Because there is a time lag between the implementation of tax cuts and their impact on the economy, it is recommended that they are combined with short-term stimulus as a two-pronged fiscal expansion.