The US economy is one of the most diverse national economies in the world and holds the leadership on the global level for the past 100 years. Its fundamental features characterize the American economic model as the one considering the globalization of business and the information revolution. Globalization of business means integration of the country and its economic entities in the world’s economic system. Now the US economy faces a number of problems, mostly of a global significance, that can slower the already announced plans. If the following president pays no sufficient attention to these issues, the economy of the USA will not maintain the leading position in the global environment in the future.
The Current State of American Economy
February 10, 2016, Janet Yellen delivered a semi-annual report to the US Congress where loud statements were made (Yellen). The Fed chief noted a positive trend in 2015 regarding the labor market, the growth of households spending level a year, and the decreasing of unemployment rate to 4.9%, which corresponds to the Fed’s long-term forecast (Yellen). However, the emphasis in the speech was made on the risks. Yellen said that, despite the absence of reasons for the hard landing of China, the volatility in the markets and pressure on commodity quotes cause uncertainty about the exchange rate policy (Yellen). This reinforces the concern about the prospects for global growth and enhances the turbulence of financial markets. Therefore, the risks of falling demand for exports from the United States increase.
The performance of the US economy is the greatest in the world. Other ones are growing more slowly than the US economy does. However, the United States has the largest trade deficit all over the globe. This means that the economic growth of large countries such as Germany, Japan, and China will continue to depend on US demand (Yellen). According to Fitch’s the diversification, high productivity of the US economy, and the dollar’s status as an international reserve currency will accompany this process.
The US economy today holds not the last place in terms of business activity and labor market. This market is worth special attention. Considering its state, one can judge about the position of the country’s economy as a whole. The main indicators of the US economic sector seem to be very positive. In particular, the number of jobs appeared in February was 242 thousand, and this rate significantly exceeded the expectations of economists (Amadeo). The 4.9% unemployment level has not been so low for a long time (Yellen). The consumers spending had also risen, accounting for more than two-thirds of economic activity in the United States. S&P 500 index after reaching a record low of two years added 9.5% on the 11th of February while interest rates on ten-year government bonds rose by 35 points and reached 1.9% (Amadeo).
The economic situation provides an optimistic view on the dynamics of inflation. In January, it reached 1.7% (Yellen). This is the largest increase since the summer of 2014. Yellen stressed that, according to the Fed’s forecasts of inflation aspect, it will remain below 2% for some time (Yellen). The dynamics of inflation expectations also demonstrate this. The narrowing of the spread between the yields of conventional bonds and inflation-protected ones shows that inflation expectations reached the lowest level since 2009. Nominal retail sales in January increased on 0.2%, which is slightly better than market forecasts (Yellen). In addition, the statistics of the previous month revised up another 0.3 points (Yellen). Given that inflation in January will be close to zero while the main negative contribution to that month’s sales has cheapened gasoline, statistics show good numbers.
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The Current Fiscal Policy of the United States
The Battles over the national debt
The size of the US government borrowing crossed the mark of $ 19 trillion while public debt has almost doubled in the past seven years (Amadeo). It will continue to grow and will approach $ 30 trillion by 2026 (Amadeo). However, until the loans are repaid, and while US Treasury bonds are one of the most stable and attractive investment types on the world market, the debt does not pose a huge threat. As of January 29, the debt was $ 19.013 trillion and law establishes this quantitative indicator. The last increase of the ceiling happened in October 2015 when the limit value has risen to $ 20 trillion (Amadeo). As predicted, this level does not exceed the US national debt up to March 2017 (Amadeo). If the latter still came close to two dozen trillion of dollars until that time, the line would increase automatically admissible, according to the decree the President of the United States signed.. Despite the growing of US national debt, on the last month the foreign state investments in these securities increased at $ 78 billion, reassured by enhancing the US Federal Reserve interest rate (Yellen).
In 2013, President Barack Obama signed a decree on forced budget spending cuts consisting 85 billion of US dollars (Amadeo). Both Democrats and Republicans opposed the cuts. During the talks in the White House, US political leaders failed to reach the agreement regarding serious budget drops. The President and the representatives of the Democratic Party insisted on the increase of taxes, but Republicans, who control the House of Representatives, were strongly disagreeing with this. To this day, the sequestration of the budget affects the decisions made in the country. Since October 22, US President vetoed the law on the defense budget for 2016 (Amadeo). This decision prompted the budget sequestration, which remains in effect, ignoring Congress’ number of proposals for administrative reforms to modernize the US Army, which is crucial for Obama ever since his presidential campaign. Obviously, the recent trend of a significant reduction in the unemployment rate and the moderately high but the accelerating pace of economic growth suggests that the US economy influences budget sequester not so much as it was expected. In the end, the deficit of growth does not necessarily lead to a decrease in unemployment, and the deficit reduction can be combined with an increase of the employment level.
The main elements of the modern tax system at the federal level are personal income taxes; at the state level there are universal and special excise taxes, and –there is also property tax on the local level. The tax policy issues are key to the election campaigns of candidates for the US presidency. Donald Trump emphasizes the need to change the US tax policy. In his program, he states:
America needs a bold, simple, and achievable plan based on conservative economic principles. This plan does that with needed tax relief for all Americans, especially the working poor and middle class, pro-growth tax reform for all sizes of businesses, and fiscally responsible steps to ensure this plan does not add to our enormous debt and deficit (Trump).
Therefore, Donald Trump promises to reduce the taxes significantly in case he wins the elections including the complete abolition of the federal income tax for citizens who are not married and earn less than $ 25 thousand per year (Trump). According to the billionaire, there is also a need to reduce the corporate tax rate for US companies to 15% (Trump). One of the pre-election proposals of Trump was also a tax reduction for rich Americans. Now such taxes are calculated according to a seven-speed system – from 10% to 39.6% (Trump). Trump has proposed to decrease the maximum size to 25% (Trump). This will give the US economy an opportunity to grow more than 3-6% per year (Trump). However, the US tax system is progressive enough and does not play a significant role in the redistribution of income. In countries with a predominance of the social-oriented model, such as Germany, Sweden, and other, tax rates are generally higher, and the state plays more active role in the process of income distribution.
One of the main risks for the US economy in terms of further rate hikes, according to analysts, is the situation in China, which predicted a slowdown in economic growth for several years to a level of 5-6% of GDP per year (Amadeo). The federal budget deficit in the first five months of the 2016 fiscal year totaled $ 352 billion, which is 9% below the result of the same period last year (Amadeo). However, given the changes in the timing of certain payments, the deficit would remain at last year’s level. Moreover, considering the projected budgetary control of the US Congress, the federal budget deficit will expand for the first time since 2009 and reaches 2.9% of GDP in 2016 (Amadeo). If the current legislation does not face any changes, it will continue to grow over the next 10 years (Amadeo). This, in turn, will lead to an increase of US government debt to 86% of GDP by 2026, which is more than twice higher than the average level of debt for the last 50 years (Amadeo).
In the current election race, the fiscal policy role wins back. Therefore, Republicans actively lobby for changes in this sphere. For example, the most extreme representatives of the Republican Party called to form a Tea Party fraction in 2009. They firmly believe in the need to cut budget spending solving the problem of public debt and not raise taxes for this purpose. Moreover, a significant part of the Tea Party adheres to libertarian views, offering even more drastic measures to deal with the budget problem than conservatives do.
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The Current Monetary Policy of the USA
The identification of the Monetary Policy
The legislative and executive branches of the US government mainly determine the fiscal policy due to decisions on taxation and public expenditure. The objectives of the country’s economic policy are to protect the purchasing power of the US dollar, encouraging the creation of conditions that ensure economic growth and a high level of employment, as well as promote a reasonable balance in dealings with other countries. The Federal Reserve contributes to these goals through measures taken in monetary policy, which affects the availability and cost of money and credit. Fed seeks to adapt monetary policy to changing economic conditions and it bases its decisions on the current economic and financial information.
Current monetary policy challenges
Under normal economic conditions of the past half century, central banks were able to control the level of unemployment and inflation adjusting interest rates. In the context of cyclical downturns to stimulate investment and economic growth regulators, it tend to be lower interest rates. Conversely, when the first signs of the economy’s overheating raise, the possible growth of inflation and asset bubbles appears. Inflation in the US is now at a low level and has not yet reached 2% level (Yellen). The sharp increase in rates in the near future could trigger deflation, the negative effect that damages to the economy.
The tightening of monetary policy in the US could increase the pressure on prices in the raw materials market, reduce investors’ risk appetite, and stop capital outflow from emerging markets. Raising interest rates is likely to lead to an increase of the credit cost for all kinds of borrowers in the country, which, in turn, could have a negative impact on economic activity, its competitiveness, and growth dynamics. Further strengthening of dollar will lead to serious problems in developing countries, which have a high level of foreign debt denominated in US dollars, in both the public and private sectors. However, the decision to keep US interest rates at the current level will support global trade and emerging of markets that have used currency devaluation to increase export competitiveness.
Current methods being employed
The Federal Reserve provides a balanced cash flow and loans to the needs of the economy in order to stimulate its growth and maintain price stability. Affecting the levels of financial institutions reserves, which, in turn, influences their ability to lend or buy investments, the Board of Governors, the Reserve Bank, and the FOMC achieve this balance. These reserves, according to US law, must be equal to the specified percentage of the deposits and can be either in cash or in the form of balances on bank accounts for all depository institutions. Fed policy is based on three instruments of influence on the reserves: open market operations, the discount rate, and reserve requirements. The most flexible and, therefore, the most important instruments of the monetary policy of the Fed’s open market operations are the purchase and sale of government securities. One conducts these operations through the trading department of the Federal Reserve Bank of New York. Depository institutions sometimes take money from the Reserve Bank to cover the temporary lack of liquidity. The discount rate charged on short-term loans is determined by the reserve banks’ Board of Directors when the Board of Governors approves it. Changing of the discount rate can be an important signal in the direction of Fed policy.
The Short and Long Term Future of the US Economy
The improvements in the labor market and decrease of gasoline prices encourage consumers. Improving of the business environment means that consumers will become more confident after the consequences of recent chaos in the stock market. Oil prices are likely to remain at relatively low level for some time but it is possible that they will increase, at least slightly, from its current level, which is very low during recent years. Moderate oil prices make some higher-cost manufacturers to stop production. At the same time, it is expected that the acceleration of economic growth will increase the demand for energy. The combination of these two factors will provide a better balance between supply and demand, which should contribute to a slight growth of prices. Low rates would help to stimulate economic development but if they are kept at such level for too long, it can lead to inflation, which hurts the economy. The labor market in the US continues to improve, and the economy as a whole is growing at moderate pace.
However, in a longer-term, the USA may face a number of challenges. The growing national debt can greatly affect the country’s economy. The main item of spending in the US is mandatory expenses the majority of which consume social programs. One reviews them annually. The level of public debt threatens a significant economic slowdown. In addition, it prevents the politicians to respond to unforeseen situations or to make changes in their policies since more and more budget funds are spent on debt service. However, if the credit markets demand higher interest rates, a scenario can significantly worsen.
Americans often have different opinions regarding the state of the government economic and fiscal policy but they agree that a mixed-type economy has made an impressive progress. Within each economic system, owners and managers provide natural, human, and technical resources for the production and distribution of goods and services. However, the way in which these disparate elements are organized and used is a reflection of political ideals and cultural aspects of the country. Still, the speech of Janet Yellen has proven that the American economy faces some problems, but the processes of diversification and federal monetary changes would help to provide stable development of the USA. The upcoming elections of the President significantly influence the policy of the government and the economy advancement. Thus, until the new President comes into office, there will be no changes in the rates.