THE AMERICAN ECONOMY IN 2014
Introduction 2
Why the Inflation Rate is increasing? 3
Economic Policy Suggestions 5
References 7
The American Economy in 2014
Introduction
The American Economy has started recovering from the financial crisis began in 2008. The GDP is increasing at the average rate of 3% annually. Even though, the American Economy did not confirm a full recovery, it looks like that a new balance in the economy is developed.
Graph 1: GDP Growth
In the nominal numbers, the American Economy is producing again; however, the real values of the GDP indicate us that the Economy is not fully recovered. The private sector contribution to the GDP is very essential, and, unfortunately, we still cannot observe a strong and steady increase in the private sector production in terms of real values.
Graph 2: Real GDP
The difference between the real GDP and the nominal GDP graphs exhibits us that there is still something wrong going on in the American Economy. The difference between the real values and the nominal values is the inflation. The inflation in the US is relatively higher. The inflation is an essential variable need to be explained carefully. In this essay, I will discuss why the American Economy faces inflation higher than the past, and I will make policy suggestions on this.
Why the Inflation Rate is increasing?
The inflation is an essential macroeconomic indicator. Many people assume that the inflation is the main problem in the economy; however, the inflation is an indicator telling us that there is something wrong in the economy. A similarity can be given in the human body. Fever works similarly to inflation. Fever is not the main problem in the human body; fever means that there is a sickness in the body. If the right sickness can be defined, it becomes possible to heal the body. Thus, the high inflation means there is something serious in the economic system.
The graph below indicates us that the inflation rate in the US has started increasing rapidly after 1980s, and after the crisis in 2008, the inflation line has become relatively steeper. 1980s were the years when the high level of consumption was promoted. The high level of consumption increased the demand, and the prices went up. At those years, the American Economy could increase the production and the income level. However, the last crisis in 2008 has proven us that the American Economy is relatively more fragile, and the increases in the inflation is not fully responded by an increase in the production.
Graph 3: Long Term Inflation in the US
Why the inflation is going up rapidly after 2008? The answer is hidden in the below graph. The inflation inside the US is increasing because most of job opportunities have moved to the other countries by the multinational companies, and inside the US, the economic dynamics are not allowing creating enough jobs for the people. In another word, the production inside the country is not developing enough. The main reason behind this is that the citizens have lost their trust in the American Economy, and they are relatively more hesitant to start new businesses in the US.
Graph 4: New Job Openings and Job Losses in the US
The picture drawn in the graphs above tells us that the American Economy is not producing enough, and the American citizens are facing the inflation. The inflation is a veil in front of the main problem. For a health American Economy, a healthy relationship between the supply and the demand has to be formed again. The high demand has become an addiction for the whole people in the US. However, the American production has to catch up with the high demand, and the economy should be able to create enough income for everybody in the country.
Economic Policy Suggestions
The American government has implemented a bailout policy to save the large companies in the country. However, it would not be a sustainable policy; therefore, the American government stopped implementing it. The Federal Reserve, after 2010, has started increasing the interest rate to attract the American capital outside the country back to the country, and following that, the FED has stabilized the interest rate to create a suitable environment for new investments in the country.
The main policy suggestion I would like to make is to create a permanent government intervention to the markets. The last crisis has shown us that the markets in the US might create troubles in the future as well. Therefore, the complete free markets might create large damages. For instance, the students’ loans market also might be an important issue in the close future. The government needs to monitor and control the important finance markets. On the other side, instead of spending on the bailout strategies, the government has to create a suitable environment for new businesses. For developing the suitable environment, the government can design an incentive program to promote the new investments and the new businesses. The incentive programs can bring more success to the US.
References
Arestis, P., & Fontana, G. (2009). Special symposium of discretionary fiscal policy: Fiscal policy
is back! Journal of Post Keynesian Economics, 31(4), 547-548.
Hayes, M. (2008). Special Forum on Recent Interpretations of Keynes and the General Theory:
The Post-Keynesian Economics Study Group – After 20 Years. European Journal of Economics and Economic Policies: Intervention, 5(2), 297-300.
Galbraith, J. (2012). Inequality and instability: A study of the world economy just before the
Great Crisis. New York, N.Y.: Oxford University Press.
