Term Paper: Slow USA Econ Recovery Chapter IV

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Slow USA Econ Recovery

Chapter IV -- Summary

Chapter V -- Recommendations

There has always been a disharmony between economic theory and economic reality as it relates to the actions execute to stimulate and sustain economic growth. Whether it be Keynesian actions or actions more tailored towards the supply-side argument, there is not always a smooth translation between economic practice and the ensuing results. At the very least there is always a lag and it is sometimes hard to decipher where action "A" truly led to result "B" and/or whether it even inhibited it.

This line of thought has become even more poignant and clearer through situations like the economic recovery in the United States after the so-called "Great Recession" that ran from 2007 to 2009. Even though the United States is now four years removed from the "end" of the Great Recession, the United States economy has been rather anemic as its gross domestic product growth, overall unemployment rate and other metrics have all been paltry to poor or, at the very least, inconclusive.

This report seeks to explore the apparent disconnect between the numerous policy tools that have been used to combat the recession and get more sustained growth going in the United States and the results that have ensued after the fact. Even with several stimulus incentives for both employers and taxpayers, several rounds of quantitative easing by the Fed and other policy levers, the results have been mixed to downright poor as the unemployment rate and GDP growth metrics, among others, remain poor even now in 2013 more than four years removed from the "end" of the recession and six or seven from the start of the same. Given that most recessions end with no intervention at all within 12 to 18 months, this has certainly not been the case with the Great Recession. Even in light of 9/11 and other economic challenges in 2001 and around that time, the economy was roaring quite well not long after that and certainly not 4-5 years after the fact.

Chapter II - Background

The economy of the United States has always swung between booms and busts over the course of its existence and that has certainly been true since the Industrial Revolution in the mid-1800's. Over that time, there have been three very nasty recessions that have reshaped the path of the United States and in all three cases, it took quite a while for the country to snap back. The first of those recessions was the Great Depression in the 1930's. Prior to that point, the Fed and its regulatory and preventative actions did not exist like they do today. The United States did not truly recover from that economic rough patch in the 1930's and 1940's until the boom of the war industry snapped the United States economy back to life in the early 1940's (Hyman, 2011).

The second recession that was exceedingly nasty for the United States was the economic "malaise" of the late 1970's and early 1980's, which came to an end after Ronald Reagan had been in office for much of his first term. Gas prices and shortage were quite nasty during that time but the economy eventually came back to life in the mid- to late 1980's (PBS, 1979). Even with the 9/11 attacks in 2001 and several other recessions from the early 1980's to the mid-2000's, the economy actually did quite well, at least in terms of GDP and general job growth, during most of that time, with the only real outliers being during the latter part of the George HW Bush administration and the earlier part of the George W. Bush administration (FactCheck.org, 2012).

Those outliers were blown out of the water by the housing and credit market crashes that came starting in 2007. Negative GDP growth and job losses were near-cataclysmic in 2008 and even early 2009 and housing prices fell seismically due to the apparent over-extension of credit and the accompanying over-valuation of houses that is still falling out to this very day in some markets. The market has started to come back but it is nowhere near where it was at its apex in the 1990's and 2000's. Many people have been foreclosed upon and many more have lost so much equity in their homes that they owe more than the house is currently worth (Luhby, 2012).

The focus of this report is the economy's apparent lack of response to the continued and pervasively ongoing efforts to stimulate the economy. Indeed, as of May 2013, the national unemployment rate in the United States actually went up to 7.6% but it's still far from its roughly 10% apex. Similarly, GDP growth was initially estimate at 2.4% for the first quarter of 2013 but has since been lowered to 1.8% by the Commerce Department. The aggregate level of consumer spending only rose by 2.6% rather than the 3.4% that was initially estimated (Gongloff, 2013).

One major complicating factor in all of those metrics, the first two in particular, is that while they are a good indicator for how the economy is doing, they are not always the easiest numbers to parse and analyze. The unemployment rate is an example. There are actually six dimensions to the unemployment rate, often shortened to U-1, U-2, U-3, and so on respectively. The rate that is reported in most news stories and the one that is noted above is the U-3 rate. It does not include people that have exhausted their unemployment benefits and it also does not count people that have given up. Lastly, it also does not count people that are under-employed. The latter is indeed accounted for by the U-6 and when those people are factored in, the unemployment rate is seen as being above 10% (BLS, 2013).

Economic growth can be misleading as well. It is generally a good sign if the GDP amounts in the United States are going up but economic stimulus and easing programs can artificially inflate what is going on and people who are thinking they see organic economic growth are possibly just seeing growth that has been artificially created by government spending and actions. Indeed, stimulus bills and the like do indeed cause GDP growth to arc upward (or less downward) but said effects are fleeting and the will fade if organic economic growth does not rise up to replace it when it does indeed fade eventually (Scully, 2009).

Chapter III - Literature Review

The invective that is lobbed back and forth as it pertains to is even prevalent when looking at scholarly articles, many of them peer-reviewed, based on the choice of words and angles of approach in the articles. For example, on such article refers to "activist" economic policies enacted by the government or at least proposed. The article, written in 2010, starts off directly calling the first-time buyer's tax credit, the temporary tax cuts and the American Recovery and Reinvestment Act (ARRA…commonly referred to as the Obama stimulus plan) as "activist" economic policies (Hein & Truger, 2009).

Indeed, many people said much the same thing about many George W. Bush initiatives. A good example would be the "Bush Tax Cuts" which were the subject of much debate. Many supply-side and conservative minds suggested that the tax cuts were necessary in light of what was going on from 2001 to 2003 so as to incur and spur economic growth and business investment spending. Many leftists and progressives condemned the cuts as "tax cuts for the rich" and, regardless, not conducive to economic growth (Hein & Truger, 2009).

The "cash for clunkers" credit is also pilloried. The totality of the plan's cost came to a total of roughly 5.5% of one year's GDP by themselves (Auerbach, Gale & Harris, 2010). A different article notes that despite the "activist" overtones that some people intimate, the deficit and surplus spending of many countries often tend to be in sync. Exactly that happen from 1996 to 2005 for the countries of Sweden, France, Germany and the United Kingdom (Hein & Truger, 2009).

The key, per the Hein article, is to identify the GDP trend over the last six years with an overall inflation rate of two percent. This arbitrary rate of two percent, and not the actual inflation rate over the actual time period, is used to smooth about aberrations and outliers that can and often do occur in the short-term. Since two percent is very close to being the long-run growth rate for inflation, it serves as a good barometer to what to use when analyzing GDP and other related economic data over a period of more than a few years at a time.

A counterpoint to the Auerbach treatise mentioned above notes that even deficit spending is sky-high and economic conditions are awful, resorting to austerity is never a solution. Even with the ever-climbing United States aggregate debt, the article drives home the point that the government cannot draw back on important social services… [END OF PREVIEW]

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