Economic Recommendations

August 7, 2012

ECO/372

In December, 2007, an economic downturn began. A recession ensued and by September, 2008, it earned the name of the Great Recession (Yglesias, 2011). The unemployment rate, declining values in the housing market, increasing foreclosures, bankruptcies, the swelling federal debt, increasing food prices, and multiplying fuel prices demanded an economic response through fiscal policy and monetary policy. As a result of those responses, the United States is in a slow recovery phase. An analysis and recommendation of the current economic state includes an observation of the proprietorship of policy interventions.
Economic Factors and the Impact on Aggregate Supply and Aggregate Demand
Unemployment
The current unemployment rate is 8.2% which is essentially unchanged from the previous month of 8.3%. There were 163,000 new jobs added in July. The government reports 9,000 fewer jobs, and the private sector lists an increase of 172,000 on the payroll. In contrast to these figures, the job deficit in comparison to the employment numbers prior to the recession is 9.7 million. At this pace, it will take 10 years to return to full employment. The unemployment rate is shifting the aggregate demand to the left. This is due to less spending power of the consumer. Output will follow shifting short aggregate supply downward. Long aggregate supply remains vertical.

Expectations
The central bank predicted that the economy would expand 2.5 percent to 2.9 percent in 2012, well below its June projection of 3.3 percent to 3.7 percent. For the following year, 2013, the Fed predicted growth of 3 percent to 3.5 percent, down from a range of 3.5 percent to 4.2 percent.
The unemployment rate, it predicted, would still be at least 8.5 percent at the end of 2012, at least 7.8 percent at the end of 2013 and at least 6.8 percent at the end of 2014 (McBride, 2012).
Other tools Bernanke has signaled are under consideration include lowering the interest the Federal Reserve pays banks to park their reserves at the central bank, currently at 0.25 percent, which could induce them to boost lending.
Another option would be to pursue a 'funding for lending' program like the one recently implemented by the Bank of England, whereby the Federal Reserve might provide cheap short-term loans to banks in exchange for guarantees that banks will resume lending to individuals and firms. The aggregate demand may be unchanged based on these expectations. The initial forecast is positive. This would shift the demand to the right. However, the correction Mr. Bernanke makes lessens the degree of expectations. This will shift aggregate demand back. The actual degree of shifts to both AD/SAS is difficult to exactly ascertain.
Expectations make it difficult to specify precisely what effect it has on the AD/AS. The expectation from Mr. Bernanke, chairman of the Federal Reserve Bank, has a greater impact on society and the economy as a whole more so than Robert Jindel, governor of Louisiana, as an example. It does not eliminate the importance of expectations as shift factors. It simply means that economists are not sure what the net effect of a change in expectations on aggregate demand is (Colander, 2012).

Consumer Income

The definition of consumer income is the amount remaining after taxes and living expenses have been deducted from wages. This represents the amount of money a person has to spend, save or invest. It is also known as discretionary income or expendable income (WebFinance, Inc., 2012). Personal income increased $61.8 billion, or 0.5 percent, and personal consumption expenditures (PCE) decreased $1.3 billion, or less than 0.1 percent according to the Department of Commerce, Bureau of Economic Analysis.

This is a very slight increase in personal income, and the consumption expenditures is a decrease. The effect on aggregate demand and aggregate supply is negligible.

Interest Rates

There are basically two types of interest rates. The long-term interest rate is determined in the loanable funds market. The long-term interest rate is the price paid for the use of financial assets with long repayment periods. Examples are mortgages and government bonds. The quantity of loanable funds supplied (savings) is equal to the quantity of loanable funds demanded (investment) (Colander 2010). The current 30-year fixed mortgage rate is 3.97%, and the 15-year fixed mortgage is 3.21%. The average interest rate on all loanable funds uses the 10-year bonds rate as a proxy which is 1.75%.

The short-term interest rate has shorter repayment periods such as savings deposits and checking accounts (Colander, 2010). The interest rate on savings deposits is 3.9%. As a note of comparison, the interest rate one year ago was 5%.

The aggregate demand in response to lower interest rates will shift to the right. This is due to the net result of more money available for expenditures investments. The aggregate supply will shift downward correlating with consumption of goods due to availability of money.

Recommendations

Following are key points of the proposal.

• An economic advisory board to mandate fiscal policy on the economy of the United States. The requirements are masters level or above in economics, hands on job experience, and no political affiliations.
• Employment Skills Alignment (ESA) group appointed by the Bureau of Labor whose function is to identify market skill deficits and provide education and training to a matching profile of the unemployed workers. Funding is in part contributory by a conglomerate of industries with those skill deficits.
• Securities and Exchange Commission anointed with a larger scope of responsibilities including overseeing transactions in investments involving congress and the banking industry for violations.
• An energy bureau appointed by the president to evaluate and propose duplicating Hoover Dam on the United States side of Niagara Falls.
• The Federal Reserve Bank to remain mandating monetary policy with Mr. Bernanke as chairman.

A review of the fiscal policies pending in congress is necessary for an accurate recommendation. The bills chosen are inclusive to the proposal and are shown below. The impact of these fiscal policies on the aggregate demand is designed to shift right.

• S.940 – Close Big Oil Tax Loopholes Act repeals five tax subsidies for U.S. oil companies, closes a loophole used to disguise foreign royalty payments and reduces the domestic tax bill. The monetary gain will be applied to the federal budget deficit. Introduced May 17, 2011, and has not passed yet (Open Congress, 2012).

• S.1660 – American Jobs Act of 2011 which extends several stimulus measures scheduled to expire the end of 2011, including the employee payroll tax holiday, extended unemployment insurance, and accelerated expensing for businesses. New measures were included to prevent layoffs and encourage businesses to hire new workers. $35 billion in aid to local governments to slow job losses in the public sector, about $100 billion in infrastructure improvement programs, tax credits for businesses to hire long term unemployed workers, and reduction in the level of payroll taxes for businesses. This will add $447 billion to the deficit over the next ten years, but offsetting the costs by raising taxes on wealthy Americans and by closing corporate tax loopholes. Previously S.1549. Introduced Oct 11, 2011 (Open Congress, 2012).

• S.1723 – Teachers and First Responders Back to Work Act of 2011, part of S.1660 providing $35 billion to state and local governments to prevent layoffs of public workers and first responders. The cost is covered by a 0.5% surtax on all income earned above $1M. Introduced Oct. 20, 2011 (Open Congress, 2012).

Classical Evaluation

In a classical view, the team would be in disharmony if there was a belief in this approach. Classical economists believe in decreasing taxes, never increasing, to boost the economy. This would limit government spending and prevent large deficits in the budget. The decreased income would prevent government waste. The team is increasing taxes by proposing to close loopholes in corporate taxes and by raising taxes on wealthy Americans (income over $250,000). The laissez-faire policy approach did not work in 1929 for the Great Depression. There is debate among economists as to whether Roosevelt’s New Deal (a Keynesian approach) pulled the U.S. out of the depression or it was the entering World War II with the attack on Pearl Harbor December 7, 1941 (Kelly, n.d.). Team C submits it was the New Deal which began in 1932. In 1941, he created the Lend-Lease Act which helped Britain by delivering old destroyers in exchange for military bases abroad. This also had a boost to the economy. The summation of this is our proposal is a Keynesian approach and not a Classical stance.

Keynesian Evaluation

The recommendation of the team is through the magnifying glass of Keynesian economics. Intermediate approaches to the economy are sometimes warranted. Effects absorbed by the economy in force majeure require thoughtful, educated responses to lessen those impacts. A perfect example is the 911 terrorist attack. The Federal Reserve intervened immediately by buying large amounts of treasury bonds, providing liquid assets to businesses. There were four other steps the Federal Reserve mandated to prevent the economy from having a domino effect which would bring the financial system to a halt (Neely, 2002).

References
American History.about.com. (2012). The Great Depression and Roosevelt. Retrieved from: http://americanhistory.about.com/od/franklinroosevelt/p/pfdroosevelt.htm

McBride. (2012). Calculated risks and economics. Retrieved from: http://www.calculatedriskblog.com/2012/06/bernanke-paves-way-for-qe3-on-august.html

Open Congress. (2012). Recommendations. Retrieved from http://www.opencongress.com

Robbins, S. P., & Judge, T. A. (2011). Organizational behavior (14th ed.). Upper Saddle River,

NJ: Pearson/Prentice Hall.

Yglesias, M. (2012). The long recession in hiring. Retrieved from http://thinkprogress.org/yglesias/2011/09/12/317166/the-long-recession-in-hiring/?mobile=nc Professor Charles H. Fine
Dr. Richard St. Clair
The International Motor Vehicle Program
Massachusetts Institute of Technology and Dr. John C. Lafrance
Office of Technology Policy
Technology Administration
Dr. Don Hillebrand
PNGV Secretariat
Technology Administration U.S. Department of Commerce
Office of Technology PolicyCensus.gov › Business & Industry › Foreign Trade › U.S. International Trade Data
Retrieved from: http://www.census.gov/foreign-trade/statistics/product/enduse/imports/c4759.html#questions