Economics There Are a Number of Different

Economics

There are a number of different metrics that can help to measure the health of an economy. The GDP is one of those numbers, and can be obtained from the Bureau of Economic Analysis. Following a decline of 2.6% in 2009, the GDP grew in 2010 by 2.9%. GDP rates fluctuated by quarter, with a low of 1.7% in Q2 following by escalating growth in the last two quarters. This represents a slow recovery from the steep declines of 2008-2009. Another measure of economic health is unemployment. The current unemployment rate from the Bureau of Labor Statistics is 9.0%, a decline of 0.4 percentage points from December. This rate is historically high, it is lower than at any point in the past year, again showing a sign of slow recovery. A third measure of economic health can be found in the inflation rate. The best measure of inflation is core inflation, which removes the highly volatile food and energy components from the index. Core inflation sits at 0.1% and has been around zero or just above for the past six months. Low inflation is not congruent with a robust economy, but can indicate an economy that is growing very slowly, which appears to be the case. Put together, these three measures indicate that the economy is growing, but very slowly.

Monetary policy is essentially maxed out at present. The Fed's target overnight rate is at 0.25%, which is as low as the central bank is willing to reduce rates. This rate results in a low cost of borrowing, which in theory brings more money into the active money supply. The buyback of government securities, under a program that has become colloquially known as quantitative easing, is another means of introducing money to the economy, which again should spur investment. Overall, however, monetary policy has only had marginal impact. The Fed funds rate was cut early in the recession and did not stem the massive job losses and decline in GDP. Quantitative easing may have contributed something to recent growth, but Q4 growth in 2010 lagged that of Q4 2009, so there is only theoretical evidence that monetary policy has had any real impact on the economy.

Fiscal policy can, according to Keynesian theory, contribute to economic growth in a recession. The accounting identity that governs this theory holds that the GDP will equal I + C + G + E -- Im. Using this identity, if consumers spend less and businesses invest less, the GDP will fall unless the government can spend more to make up the difference. Alternately, a shift in the current account will need to take place. Fiscal policy is the government spending part of the identity, so in theory an increase in government spending will result in short-run improvements to the GDP. There is a case to be made that the stimulus package was responsible for the GDP growth in the second half of 2009 and the first quarter of 2010. Fiscal policy in neoclassical economic theory is less relevant -- spurring investment by means of cutting taxes would be more effective for example.