Written by Evan Gao '16
Over the last three months, the U.S. economy was threatened by two potentially devastating events: the fiscal cliff and sequestration. Policymakers managed to steer clear of the fiscal cliff with a bipartisan plan to avoid federal spending cuts and tax hikes, but politicians in Washington, unfortunately, allowed the sequester to occur. Nevertheless, our economy seems to be remaining steady.
Despite automatic spending cuts imposed by the federal government on major sectors and programs, the economy picked up speed in February with the addition of over 236,000 jobs. The unemployment rate sank two-tenths of a percentage point from 7.9 % to 7.7% over the course of the last two months. With the unemployment rate the lowest it has been since December 2008, the economy is visibly displaying strong signs of growth.
The Federal Reserve has also played an important part in U.S. economic recovery. Since the 1970s, the Fed has long believed that the key to economic prosperity is to combat inflation. The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 deregulated the banking system in response to the Savings and Loans Crisis. Signed by President Jimmy Carter, this act helped boost economic activity by allowing banks to participate in mergers and acquisitions, which gave all banks an equal opportunity to expand their branches and cash flows. The banks were also allowed to form their own interest rates so that depositors could choose from competitive interest rates on deposit accounts to combat the increase in inflation. Modest interest rates result in a stronger currency, reducing the costs of consumer goods and increasing consumer spending and GDP. However, interest rates that are too high would strangle the economy, incentivize consumer saving, and decrease consumer spending.
As of now, the Fed has utilized billions of dollars of stimulus money to improve the health of the labor market through its quantitative easing initiative. Ben Bernanke, chairman of the Fed, has vowed to maintain interest rates at historic lows until unemployment is at least 6.5 %. Low interest rates stimulate consumer demand and can magnify businesses’ bottom lines.
Obama is of course, doing his part as well to aid the economy and protect the outsourcing of American jobs, despite harsh criticism from the political left. Critics say that he is not aggressive enough. However, Obama has already enforced U.S. trade laws more strictly than his predecessor to protect American manufacturers from being weakened by subsidized imports from other countries, mainly China and India. He also sought to form tariffs to protect American workers in the tire industry. Furthermore, his proposal to rewrite the tax code to discourage the offshoring of U.S. jobs has constantly been subdued by the members of Congress.
If the White House and Congress can settle their tug-of-war, the economy is poised for even stronger growth. But we still need to be wary, as John Boehner, Speaker of the House, asserted, “Any job creation is positive news, but the fact is unemployment in America is still way above the levels the Obama White House projected when the trillion-dollar stimulus spending bill was enacted.” Thus, this decreasing trend in unemployment is not something to celebrate just yet. We need to take into consideration how much of the decrease in unemployment is due to job creation and how much is due to the shrinkage of the labor force. Also, the labor market may be negatively affected by the sequester in the coming months. The U.S. has seen similar positive trends in unemployment in the last four years. Only time will tell if this recent positive trend can be sustained.
Sources:http://www.nytimes.com/2013/03/09/business/economy/us-added-236000-jobs-in-february.html?pagewanted=1&_r=0&ref=economyhttp://www.washingtonpost.com/business/economy/obamas-record-on-outsourcing-draws-criticism-from-the-left/2012/07/09/gJQAljJCZW_story.htmlhttp://www.washingtonpost.com/business/economy/fed-shifts-focus-to-jobs/2013/03/11/1d970b78-7d11-11e2-82e8-61a46c2cde3d_story_1.html