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Business Cycles C3

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Recession refers to the stage in a business cycle marked by the reduction in production and a rise in unemployment. There is also a fall in production as measured by GDP, investment, incomes, business revenues, and employment. A recession can also be described in terms of the decline in demand for goods and services in an economy, which usually can occur if people are not willing or unable to spend money. In turn, this leads to the deployment by employers, which is done with an aim to reduce wage bills, thus raising unemployment (Federal Reserve System, 2004). For instance, the asset bubble of 2005-2008 in the U.S. collapsed, leading to a recession in 2008 and 2009, during which massive wealth was lost.

At the moment, there is no recess in the U.S.  The markers of economic performance indicate a growth in GDP, with an estimated growth of 2.8% in the fourth quarter of 2011 going into 2012. The growth is attributed to personal consumption, exports, residential and non-residential field of investments, as well as private inventory investment. However, there were negative effects due to federal and local government spending as well due to imports. Domestic consumption increased by 2.0 % while the consumption of durable and non-durable goods increased by 14.8% and 1.7 % respectively. Inflation rates went down to 3% in December 2011. At the same time, unemployment rate has gone down to 8.5 %, the lowest in three years. Total non-farming payroll employment rose by 1.6 million, with private sector employment rising by 1.9 million over the last year. However, the government employment fell by 280,000 in the year. One leading sector is the transportation and warehousing, which recorded some 50,000 jobs created in December 2011. Additionally, the average hourly wages rose for some sectors while remaining constant at the worst. For instance, the hourly payment for private non-farm payroll workers was 23.24 dollars, a 0.2 percent rise. The payment for production and non-supervisory employees remained constant at 19.54 dollars (The Guardian, 2012).

At the year 2011, most of the federal expenditure was used in defense: 20% on social security, 20% on medicare, 21% on safety net programs and debt interest servicing. In his budget proposal, President Obama had suggest a tax cut deal to stimulate the investment and spending, which would, in turn, increase the employment and revenue generation. The tax reduction initiative effected in December 2010 has reduced federal revenues with estimates of budget deficits in 2012 to be 1.6 trillion U.S. dollars. The most controversial issues in the President’s budget proposals at the moment are the reduction of the public debt and budget deficits with other areas of concern being tax reforms, social security, and medicare expenditures. Clearly, the types of fiscal policy tools to apply would be those that will stimulate sustainable economic growth while at the same time complying with the major long term budget concern demands (The Guardian, 2012). The fiscal policy tools that could be used to stimulate the economy are:

Taxation

According to the budget proposal of 2011, the budget is aimed at supplemeting the budget deficit created after comparing the expected government spending of 3.8 trillion dollars with the 2.5 trillion dollars in federal revenue. The budget proposed a tax reform targeting reduction of tax relief incentive earlier granted to higher-income taxpayers. This tax liability would raise 1.4 trillion dollars in tax from high income earners while lowering tax from low income earners by 330 billion dollars. The difference, 1.1 trillion dollars, will be realized in the next ten years. I would support the budget’s proposal to reduce the tax burden to the extreme poor as a way to encourage investment and create employment. The proposal to introduce appropriate taxes to the high end income earners would also lead to revenue realization. More effective revenue collection methods would also be the means to boost federal income.

The Control of Government Expenditure

All government expenses that are not getting re-injected into the economy should be reduced. The 2011 budget proposal focuses on the reduction of defense-related expenditure and social security. Other focuses are on medicare, science, and research and safetynet programs. While I agree with the controlled reduction in the defense budget, I would suggest an increased funding for research since the rapid pace of global technological advancement may define success or failure in a nation’s economic system. Further, continuous study and analysis is the only tool of knowledge regarding the performance and future projections. I would suggest a cut in safetynet programs, which can be complimented with better government investment initiatives like government bonds and securities. This will be a way to encourage the investment and government revenue realization while, at the same time, providing a firm security for the nation’s pensionable population (Federal Reserve System, 2004). On the same platform, I would encourage more government involvement in purchases. Lower level investors like small and medium enterprises are unlikely to venture into the competition-dominated market, especially export markets. The government should step in to facilitate easier access to trade opportunities for smaller firms through the expansion and regulation of markets.

Interest Rates

The government employs interest rates to regulate economic performance through controlling base lending rates for investment and commercial banks. In the present, the base lending rates were set low in order to encourage borrowing and investment. This will lead to higher employment and quicker economic recovery. I would suggest no change in this area since the inflation is currently manageable at only 3 %.

Export System Initiative

I would also advise the creation of an export system initiative that insulates small businesses from unhealthy competition both within the U.S. and internationally as a way to encourage an entry into business of small companies. This would ensure more growth for local companies as well as job creation and re-investment.

As an advisor to Ben Bernake on fiscal toolls that would lead to economic growth, I would suggest a number of critical issues.  First, I would suggest that, in order to reduce the budget deficit, the government should avoid using the conventional borrowing through the issuance of government bonds, treasury bills, or consols. This only serves to increase the cumulative debt obligation in the long term, which must be met by future tax payers. However, I would suggest the disposal of redundant government resources like machinery, buildings, and other assets to offset the immediate deficit (Trading Economics, 2011).

Another key area would involve the refinement of the revenue collection system in order to minimize revenue loss through practices such as tax evasion. The integration of the full benefits of Information Technology, though costly, would make tax responsibility easy, convenient, and unavoidable. Tax losses due to inefficient or incomplete tax procedure are crucial contributing factors to the budget deficit. Thirdly, I would also suggest less reliance on taxation but more focus on generating federal income through government investments, especially in areas where no competition between the government and its citizens would act in contrast with the very idea of promoting individual investment by the government. The other suggestion would be on interest rates. For the economy to recover and continue to develop at a sustainable rate, the interest rates would need to be set at a low enough level to encourage borrowers who wish to invest while, at the same time, it should be more than enough to discourage the overflow of liquid cash in the population. This can easily lead to inflation and consequently discourage lenders from issuing funds at low interest rates.

Another extremely essential tool is the provision, enforcement, and continuous monitoring of a competent system to analyze financial markets. This is in order to prevent the build up of the asset or services bubbles like the housing bubble of 200-2006, which culminated in a recession in 2008-2009. The most crucial policies are new financial products, which extend to the global platform, such as financial derivatives. Collateralized Debt Obligations should be monitored and their insurance regulated by the federal system. However, the recess of 2008-2009 was analyzed and proper global measures decided upon in order to combat threats of financial system’s collapse.

It is critical for Fed to take drastic steps, which would reduce inflation in terms of money supply.  Trading Economics (2011) indicates that raising the base lending rates is one of the notable steps that can be taken by Fed towards achieving this.  The presence of excess money in the population leads to raised prices for goods and services. This is because many people can afford to pay for the goods or services such that even if the real value of the purchased item has not changed, the amount paid for it has, and this means a degradation of the value of money. Similarly, raising lending rates discourages borrowing, in turn reducing the amount of cash in circulation (The Guardian, 2012). In conclusion, the U.S. government should enact sound policies that will ensure short and long term growth of the country.

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