Fundamentals of Macroeconomics

ECO/372 – Fundamentals of Macroeconomics

During an economic downturn and recovery like the one the U.S. began experiencing in December of 2007, normal economic activities can have an extraordinary impact on the everyday life of the consumer.

Purchasing groceries, massive layoffs, and decreases in taxes are just some of the activities that can play a major role in the flow or resources from government to households and also businesses.

The structural stagnation hypothesis largely blames the globalization of the economy for the struggling U.S. economical situation, and provides insight into why the recover process took so long (Colander, 2013).

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The cost of groceries had been steadily climbing since the recession began, and continued to be an increased burden on many households who were already dealing with stagnate wages. The consumer was faced with the option of spending less money on other commodities and instead buying food for the family, or opting to continue spending money on goods and services while the family struggled.

This is an example of opportunity cost, which is the best decision based on the available options. Most household’s will chose to buy groceries and forego the alternative goods and services, which has a negative affect on local businesses. This results in a downturn in the business cycle, causing unemployment to rise and output to fall.

The loss of output has a negative affect on trade, creating a deficit that helps fuel the structural stagnation hypothesis. In a typical recovery, economic expansion must significantly exceed the trend growth rate to make up for the decline and catch up with the rise in potential output. Government had also been impacted financially in a negative way, with the largest number of Americans receiving food stamps on record. Ever.

Increased government assistance programs added to the national deficit, and resulted in the first ever downgrade in the U.S. credit rating. These and other demand-side macro policies by the Obama Administration to assist households and businesses with handouts, allowed the recession to steam along.

Massive layoffs of employees was a result of the downturn of the business cycle. The unemployment rate was still a problem after seven years since the beginning of the recession, with four workers looking for employment for every one job that was available.

Since consumer spending was still stagnate and not robust enough to overcome the population growth, output continues to be a problem for the trade deficit. Colander (2013) stated, “Simply put, the trade deficit translates into higher unemployment and lower potential output until these displaced workers find new jobs in different fields that are competitive in the globalized economy.”

President Trump has proved this notion incorrect, and Manufacturing jobs are now returning to the U.S. in large numbers as a result of his successful trade negotiations.

Businesses were losing valuable resources in the form of skilled employees, since they could no longer compete in the global environment due to lower production costs among foreign producers.

Government had implemented even more taxpayer funded training programs to improve trade skills among primary wage earners in households across the U.S., but this did not solve the problem. The Obama administration watched helplessly as the Federal debt grew to record levels.

The crux of the issue is that production costs in the U.S. are already higher than other countries, and until the global competition catches up, or domestic wages fall, it will continue to be tough for Americans to find the kind of jobs with stability and wages that have been enjoyed in the past.

Stifling tax burdens and regulations imposed by the Obama administration continued to choke the economy.

The Obama administration had largely waived the Affordable Care Act (Obamacare) penalties for many large businesses, resulting in lower overhead. This is just a small example of the nickel and dime programs attempted that did not change the playing field for businesses that still faced the burden of a much higher corporate tax rate than the rest of the world.

Cash for clunkers was a largely failed Obama program aimed at giving households a tax break for trading in old, polluting automobiles. Since consumer confidence was so low, instead of going out and spending the clunkers tax break to help out businesses like the government wanted, that didn’t happen. The shovel ready jobs program, another failure.

During the 1980’s when Reagan massively cut taxes, consumers and businesses reinvested in the stock market, and spent money at local businesses which helped the business cycle grow (Harper, 2014).

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The structural stagnation hypothesis attempts to explain how the flow of resources from households, to businesses, and government in the United States has been ravished by globalization. Foreign producers had been and continued to move up on the supply chain, resulting in more competition for domestic businesses, wage earners, and the U.S. government.

More competition had meant more layoffs for consumers whose purchasing power, had continued to remain stagnate. This structural stagnation could have be dealt with by lowering domestic exchange rates, federal and local tax burdens lowered, and with the rise of productivity.

Now that President Trump is in office, the economy is now moving in the right direction largely due to his massive tax cuts and removal of over regulation by the Government.

Reference

Colander, D. C. (2013). Economics: Principles, Problems, & Policies (McGraw-Hill Series in Economics) – Standalone book by McGraw-Hill Education

Harper, D. (2014). JFK and the Reagan Revolution: A Secret History of American Prosperity by Portfolio

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