Times of Economic Downturn - Essay Example

Why Has The Economy Not Yet Fully Recovered From The Recession, In Spite Of The Government Stimulus Package? Throughout history of humankind, societies have at given times experienced recession. It is inevitable in as much as it is avoidable. Generally, economists define recession as a situation whereby there is a contraction in business cycle and the economic activity is experiencing a downturn (Olivier 2). Recession may occur in the world at a certain time or can occur in different countries in diverse times depending on numerous macro and micro- economic factors. Recessions are characterized by reduced production in the sense that there is a decline in the following measures of production; investment spending, gross domestic product (GDP), household incomes, capacity utilization, inflation, and business profits. Often recession occurs when spending falls following adverse supply recessions. Since recession has adverse effects such as increased rates of unemployment, reduced business profitability, and negative social effects like family instability, most countries usually put measures in place to prevent it from occurring. In the event that it occurs, governments usually respond by adopting macroeconomic policies such as decreasing taxation, increasing government spending, and increasing money supply (Samuelson and Nordhaus 14- 15). Since the recent recession began in late 2007, the United States economy is yet to recover fully from it. This is despite numerous efforts by the government such as the economic stimulus package. There have been debates among scholars, economists, government officials, policy makers, and the public on what could be the reasons behind delay in recovery despite the fact that government has put efforts towards recovery such as the stimulus package. The debates have been stirred further by the fact that other large economies such as China recovered long time ago and are on the path of growth. Besides, there are worries that even though US has witnessed various minor and two major recessions since its independence, the most recent recession may be the longest to recover from and the most difficult in US history (Whoriskey 1). All major measures of the health of the economy namely industrial production, employment, output, and incomes still indicate that US is yet to recover fully and that the growth has been significantly weak despite the fact that, technically, the recovery begun in June 2009 (Rampell 1). This concern has captured the attention of Barrack Obama, the US president and has been on record saying on 6th August 2011 that he acknowledges the challenge and that the country’s urgent mission at the moment is to create jobs and expand the economy (Rampell 1). Therefore, why has the economy not yet fully recovered from the recession in spite of a number of efforts and more specifically the government stimulus package? This discussion will aim at answering this problematic phenomenon. It is worth noting that the economy of the US is definitely on the right trajectory. However, while the recovery is commendable, we are very far from full recovery. Weak incomes have contributed to the slow economic recovery. This is the first reason why the economy is yet to recover fully; economists and policy- makers alike admit that consumer spending is a key driver for economic recovery (Rampell 3). Thus, since the incomes are weak, spending is correspondingly low and this hampers the economic recovery. The total consumer spending is lower among the Americans now; a scenario that is unexpected since there has been increase in population and it is expected that total consumer spending should be higher. In addition, construction is witnessing a slow down further interfering with recovery. Related to this, home prices are down by 24 percent and since the country has buffer in housing it will mean that the crisis will persist for long since it will take longer for financial institutions to recover their mortgage money (Rampell 6). Moreover, uncertainty about economic policy has led to the economy not to recover fully. Economic policy uncertainty is brought about by the significant number of provisions of federal tax code which are set to expire in coming years, regime uncertainty, disagreement about inflation and purchases of goods and services by the government, and the frequency of media referring to economic uncertainty (Baker and Bloom 8). General high economic uncertainty often results to high policy uncertainty and this may lead to the recession to persist longer than expected. Uncertain economic policy contributes to the prolonged recession in the sense that businesses are uncertain about regulatory initiatives, health care costs, and about taxes and therefore they are made to adopt a more cautious stance. Most businesses find it costly to make an investment mistakes and they naturally wait for more certain times in order to expand or enter into new ventures. It thus follows that if a considerable number of businesses are waiting to expand then the recovery will take longer or fails to take off at all. Weak investments in product development, worker training, and capital goods undermine economic growth in the long- run (Baker and Bloom 11). Energy uncertainty has also been cited as another factor that interferes with the recovery. It is uncontestable that the US is the biggest consumer of energy in the world and any uncertainty relating to it or its policies creates uncertainty in the economy. Major events in Arab world such as uprisings in Libya, Tunisia and major shocks in the Middle East creates uncertainty in the economy hence slowing its recovery. In addition, world’s social, economic, and political systems have been greatly integrated through globalization and occurrence of events in one part of the world has an impact on the other parts of the world as well. It is against the background of this fact that the slow economic recovery from recession has been linked to America being part of a highly integrated global economy (Dwyer and Lothian 17). Some countries across the world produce goods at lower costs compared to America due to numerous factors that affect cost of production; as a result, these countries sell their surplus goods to America often at relatively cheaper prices compared to locally- produced goods which affects the local industries and the economy in general. For years Americans have been tightening their belts regarding consumption, however, in recent times cheaper products from other countries have prompted them to share the burden of making markets for the world’s producers with other countries and this has negatively impacted their savings and local industries thus slowing down economic recovery (Dwyer and Lothian 24). Dwyer and Lothian further argue that Americans have both internal and external pressures to purchase goods of which they respond to despite the fact that their households incomes may not have necessarily improved. It can be agreed from previous researches that the US is indeed a nation of consumers. Previous data from reliable sources such as the U.S. Commerce Department show that household and personal consumption of goods and services account for 70% of U.S. GDP. This percentage is much higher compared to other countries such as the UK and Germany where it is about 50%. Therefore, this high demand results to dumping of surplus and inexpensive manufactured goods from other parts of the globe leading to reduced profits for local manufacturers and diminished savings on the part of the consumers thus contributing to slow recovery from the recession. In conclusion, from the discussion it is evident that the US economy is yet to fully recover from recession in spite of government stimulus package. As it has been noted, this scenario is attributable to a number of factors namely; diminished spending on the part of consumers and government, uncertain economic policy, and the integrated global economy. Given the depth of the deep recession, it was expected that it would persist for a long time. However, the effects of the recession have stayed much longer than expected; economists argue that deep recessions such as the recent ones are usually followed by recoveries which are steep, but recent experience in the US economic recession shows quite a different scenario; a deep recession being followed by flat recovery. Since recession has negative impacts on the general wellbeing of any country and its citizens there is need for the government and people of the US to enhance their efforts towards recovering fully from the crisis as a matter of urgency. The discussion has shown that citizens contribute to slow recovery as well through their consumption habits. Therefore, national economy must be shaped in such a way that the resources are adequately utilized, citizens make appropriate choices on their consumption, local industries are encouraged to make sustainable products and provide services globally that enhance quality of life, and certain and appropriate economic policies are put in place. Works Cited Baker, Scott., and Bloom Nicholas. Policy Uncertainty and the Stalled Recovery. 22 Oct 2011. Web. 15 Nov 2011. Dwyer, Gerald., and Lothian James. International and Historical Dimensions of the Financial Crisis of 2007 and 2008. Journal of International Money and Finance, 2011. Print. Olivier, Blanchard. Macroeconomics. Prentice- Hall, 2006. Print. Rampell, Catherine. Second US Recession Could be Worse than First. The New York Times, 8 Aug 2011. Web. November 14, 2011. Romer, Christina. Finishing the Job: The Policies Needed to Ensure Full Recovery and Fiscal Stability in the United States. 27 May 2010. Web. November 14, 2011. Samuelson, Paul and Nordhaus William. Economics. McGraw- Hill, 2004. Whoriskey, Peter. Recovery could be one of Longest, Most Difficult in U.S. History, Economists Say. 19 Aug 2011. Web. November 14, 2011. Read More