Macroeconomics -- Review of Age-Old Economic Concepts

Macroeconomics -- Review of Age-Old Economic Concepts through the Eyes of Current Events in the Newspapers of Today

It has been a unique privilege to embark upon the study of economics during this period in our nation's economic history. One might be tempted to say this is a strange statement, at first. Would it not be better to begin to study economics during a boom period, such as the nation enjoyed during the 1990's? But one must disagree. The most interesting things about today's economy are the many contradictory aspects of its current, halting and painful economic recovery from a recent recession.

The Federal Reserve System and Recent Fiscal Policy

When the economy first began to sour, one of the first things the Federal Reserve chairman, Allan Greenspan, did was to lower interest rates. Lowering interest rates means that it is not in the consumer's interest to save money, because banks give very little interest on loans. However, all is not bad for consumers in a state of lowered interest rates. When interest rates are low, and they were at an historic low for America during the recession of the first part of the 21st century, consumers can and should use the opportunity to borrow money from banks to make large purchases, such as cars, or to buy a home or to make improvements to their home.

The lack of incentive to save when interest rates are low does not extend merely to such large purchases, however. The main reason interest rates have an anti-recession effect is that there is an attempt, on the part of the Federal Reserve, to encourage consumers to spend their dollars in all spheres of the economy. This encourages businesses to produce more goods to meet increased consumer demand, and to hire more workers to meet such increased consumer demand and spending.

Unemployment and Business Cycles

If unemployment were so easy to remedy, simply by lowering or raising interest rates, the business cycle would not be as nearly difficult to manage as it is, however. Unemployment can be affected by many factors. For instance, the recent economic downturn caused unemployment to escalate mainly in the white-collar sector of educated professionals, circumventing current economic wisdom that better education means a better job. Thus unemployment can affect certain sectors of the economy more than others. Also, more and more businesses are taking advantage of cheaper labor costs overseas. Thus, even if consumer demand increases, this does not mean that employment, particularly employment in all sectors of the economy at all times will increase.

Deflation, Inflation, and Monetary Policy

Another concern of the Federal Reserve was that the U.S. economy might experience deflation, if the recession hit the United States economy particularly hard. What could be so bad about lower prices, you might ask? But although lower prices sound wonderful, if prices keep going down, people's money is worth less that they have saved, and businesses have less of a reason to produce goods to meet demand. Fortunately, this did not occur.

On the other hand, if an economy is booming, the Fed may actually attempt to stem the expansion and reduce the supply of money in the economy. Again, one might ask -- why is it bad to have nearly full employment? (Full employment may be defined as when all individuals looking for work, have work) However, inflation can skyrocket during a sharp period of boom, causing inflation to go rapidly up, spending to go down, production to halt, and thus causing a sharp boom followed by a precipitous bust in the business cycle. The Federal Reserve must cushion the ebbs and flows of the business cycle as much as possible

Today's International Economy -- Conclusions and Speculation for the Future

The Federal Reserve is having more and more difficulty, however, cushioning the business cycle's harshest points of decline and rise, given today's increasingly diverse and internationally focused economy. The United States is currently an import-heavy economy. This is why so many goods are available to American consumers from all over the world. But to produce these many wonderful goods at competitive and attractive prices, many workers in poorer nations must help to manufacture them.

Such manufacturing nations, such as China, may be defined as export-heavy, or relying upon their relatively cheap currencies, so that their goods are priced more competitively abroad, for consumption in richer nations with more highly valued currencies. But the outsourcing of jobs to such export-heavy nations from the U.S. is coming under increasing criticism as supposedly 'Third World' nations as India are now far more educated and are sources of technically literate populations willing and able to work for lower wages. Thus, as well as mere hands to manufacture goods, the more competitively priced minds of the larger world run a risk of threatening the jobs of U.S. workers today.