United States Macroeconomic Policy Most

United States Macroeconomic Policy

Most of the current voices in the United States, as well as some of the reputed international commentators on the matter, have pointed out that the U.S. economy is heading towards a significant recession. This would be characterized with extremely low GDP growth figures in 2008 (below 1%), a decrease in the number of new jobs created every month, as well as a general shrinkage in the economy, often correlated with some of the crisis in different sectors, most notably the financial and credit sector.

This is certainly true to a great extent. First of all, the U.S. economy in 2008 carries the burdens of the past years that saw a gradual, but significant increase in the budgetary deficit, along with a significant increase in the current account deficit. There were several notable explanations for this. First of all, the war in Iraq is costly and much of the budgetary expenses went towards the defense industry and towards supporting the war in Iraq. This type of expenses did not help create other positive reactions in the economy and were simply money spent for the war.

In terms of the current account deficit, the U.S. has continuously had a greater amount of imports compared to exports for both of President Bush's presidency terms. This led to a high current account deficit, as the difference between import and export value began to be increasingly higher. One of the main translations of this was in the continuous decrease of the U.S. dollar value, which reached the lowest historical level against the euro this past week and still looks to be on a downwards trend.

The U.S. economy is also currently having important structural problems, most importantly because of the credit and financial crisis, as well as the mortgage and real estates problems that have occurred during the past year. Despite the optimistic declarations by some of the U.S. officials, the reality on the ground showed that the U.S. real estate market developed a dangerous speculative bubble which burst at some point during 2006. As a result, houses have lost their values and people have discovered that they had to pay mortgage rates for houses they had purchased at $500,000, but that were not worth only $250,000. The prime mortgage market collapsed and affected the economy significantly.

Starting from the identification of current problems of the U.S. economy, as presented in the past paragraphs, we can now move on to identifying the appropriate measures by which these can solved. First of all, in terms of monetary policies, the Federal Reserve will need to decrease interest rates, as it has already done several times starting in autumn of 2007. The effect that this is likely to have is to stimulate the economy and induce investment in private businesses rather than saving.

The explanation for this is quite obvious. Individuals and organizations can chose to either invest their money in businesses or to save them in the bank or in different financial instruments. With high interest rates, the incentive for the entities is to save their money in banks and low risk financial instruments, mainly because there is a higher return guaranteed, usually at a lower risk than that involved with opening a new business and investing in a new enterprise.

With a lower interest rate, that incentive no longer exists and this is usually an instrument by which private entities can be driven out of saving and into investing into new business on the market. Obviously, such an action usually creates the appropriate momentum for economic development, creating jobs, increasing governmental revenues through revenues from taxation and helping the country out of the economic recession.

In terms of fiscal policies, the measures that the government needs to take will all attempt to move the IS curve further to the right and, in this sense, to stimulate the national economy, reduce the period that the country will pass through the recession and determine a national economic growth. There are two important means by which this can be done: increased governmental spending and decreased taxes, with a less restrictive taxation policy. As we can see on the IS - LM graph, both of these measures will move the IS curve to the right.

First of all, an increased governmental spending is a mean by which new jobs can be created and unemployment can be kept low. Governmental intervention in this direction can manifest itself, for example, by new construction projects, including new roads or buildings. While on one hand, this stimulates employment, as individuals will need to be employed in order to complete these public projects, on the other hand, these are also the types of projects likely to stimulate the economy in its entirety and be useful for economic development in the long run.

Second, a decrease in taxation levels, also moving the IS curve to the right, is the appropriate incentive for individuals to start their own businesses and strive to maximize their incomes. Because of lower taxation levels, they will be more inclined to use their savings to create their own businesses rather than to save the respective values. This will create the right momentum for the aggregate economy as well.