Introduction
A general understanding of macroeconomics shows that recession occurs when the business cycle of an economy contract. During the recession, there is a fall in GDP growth, household income, business profit, and investment point towards an economy that is in recession (Colander 11). Consequently, recession increases unemployment and corporate bankruptcies. The US economy is in recession. However, the recession in the US has lingered longer than was expected.
Economists have presented various arguments to explain this anomaly. Some believe structural problems have forced the economy into recession over a long period. Colander posits that in the long-run structural stagnation is caused due to the global economic links while in the short-run it occurs as an aftermath of the financial crisis (Colander 11). In this essay, it will be presented various arguments suggested by economists to alleviate recession and bring back economic growth.
Why is the crisis enduring?
The financial crisis in the US economy is enduring, as structural stagnation has taken longer to recover. Krugman and Layard refute the structural stagnation argument (par. 13). They argue that, if the recession in the US was a structural problem induced, then fiscal cut would increase output growth (par. 13). However, this did not happen, which they believe is because there is a shortage of demand.
On the other hand, Colander suggests that the sustained recession triggered due to the structural problems was caused in the economy due to globalization. He argues that such stagnation takes longer than a common recession, to recover. Further, he points out that the decline in the prices globally induced a decline in aggregate demand, affecting output and creating a trade deficit. Therefore, with the decline in output, the whole economy spiraled into a vicious circle of low income and output. However, Colander pointed out that unemployment in such an economy could be reduced only if the unemployed accepted jobs that paid less (17).
Not all economists support this argument. The hypothesis presented by Krugman and Layard is different from that of Colander. The latter believes the reason for the sustained recession is due to the structural stagnation in the economy. On the other hand, the former refutes the structural recession argument and posits that excessive borrowing and lending activity were the reason for the financial crisis and the sustained recession was caused due to the dampening of consumer demand (Krugman and Layard par. 23).
Inequality and Unemployment
Another problem that the US economy faces is inequality and unemployment. The unemployment rate in the US had increased from 4% in 2000 to almost 10% in 2014 (Baker and Bernstein 7). Higher the level of unemployment, the higher is the inequality. According to Keynesian economics, the economy will not recover from a recession if consumer spending is not increased (Cassidy 2). An economy in recession for six years has very low income due to high unemployment.
However, the inequality of income is very high. Then how do we reduce inequality in the economy? Baker and Bernstein believe achieving full employment level and improving infrastructure are the only means to boost income and spending, thereby pushing the economy out of recession (10). Full employment can be achieved by increasing net exports and reducing trade deficit (Baker and Bernstein 12).
They argue that most of the unemployment in the US economy is due to the outsourcing of manufacturing to offshore locations. Therefore, if these productions can be brought back to the country and the exchange value of the dollar is reduced, it will increase domestic production, create jobs, as well as boost demand for locally made products (13). Keynesian economics suggests that deficit spending is necessary to decrease unemployment in an economy experiencing stagnation (Cassidy 7). This will reduce unemployment and inequality.
Unemployment as a perennial problem
Some believe that the traditional educational system is inadequate to address the demand of the modern job market. Unemployment occurs due to a gap in the traditional education system and the modern economy’s requirement. The nature of the current recession is so severe that it has pushed many companies into bankruptcy, thereby reducing jobs. The traditional model of addressing unemployment is no longer useful in the current recession as there are fewer jobs available in the market (Wisman and Reksten 25).
Hence, the only solution is to “guarantee employment and retaining” (Wisman and Reksten 25). Further, a new method of education must be adopted to adjust to the needs of the current economic conditions (Wisman and Reksten 26).
Lerman presents a similar argument stressing the need for an aggressive system of education necessary to remove inequality (374). A traditional education system is not the only solution to reduce inequality and unemployment. He presents the example of Korea, France, and Spain and shows that these countries though have produced a large number of college graduates have failed to reduce inequality (Lerman 374).
Clearly, a large part of the population with higher education has remained unemployed. Similarly, the US policy-directed increase in the level of traditional education has led to a higher percentage of college graduates but unemployment has not declined at a similar rate (Lerman 375). Lerman points out a vigorous apprentice system can reduce the gap between skill and learning (376). Since apprentices require less financial support than a college education, it is a low-risk venture for middle-class workers (Lerman 376).
Public Spending and Growth
One problem contrary to popular belief is the decline in public investment that hampers future growth and incites inequality in the economy (Hungerford 2). There has been a fall in public spending in physical capital, nondefense spending on R&D, and education and training spending (Hungerford 8). As these have fallen relative to GDP, it is expected that it will weaken future growth (9). Further, spending on social security programs like Medicaid and Medicare will also be reduced (9).
Hungerford argues that curtailing public spending on social insurance will only shift the cost on the households, which will increase the overall cost of health in the US, therefore increasing the burden of medical expenses in the country (9). He points out that the US has one of the lowest tax burdens among the developed countries. If taxes are slightly increased (for example implementation of VAT), it will increase the overall income of the economy.
Thus, policymakers should increase public income but not reduce public spending as investments in infrastructure building have a direct relation to economic growth. Further, inequality of income is another concern for the US. Thus, a progressive tax system should be introduced to reduce gap marginally. Hungerford suggests the introduction of taxes on capital income, which will reduce the after-tax income of the richest 1% population of the US (16). In conclusion, it can be stated that there are various suggestions that economists have presented to counter the present policies undertaken by the US government that may alleviate the recession. However, the government of the country is yet to implement any of them.
Works Cited
Baker, Dean and Jared Bernstein. “Want to Attack Inequality? Reduce Unemployment.” Challenge 57.5 (2014): 6–16. Print.
Cassidy, John. “The Demand Doctor.” The New Yorker. 2011: 1-10. ProQuest. Web.
Colander, David. Macroeconomics. London: Content Technologies, 2016. Print.
Hungerford, Thomas L. “We’re Not Broke: America’s Real Spending Problem and How to Fix It.” Challenge 0.0 (2016): 1-19. Print.
Krugman, Paul and Richard Layard. “A Manifesto for Economic Sense.” Financial Times. 2012. Web.
Lerman, Robert I. “Reinvigorate Apprenticeships in America to Expand Good Jobs and Reduce Inequality.” Challenge 59.5 (2016): 372–389. Print.
Wisman, Jon D and Nocholas Reksten. “Rising job complexities and the need for governemnt garunteed work and training.”The Job Guarantee: Towards Full Emplyment. Ed. Forstater, Mathew and MIchael Murray. New York: Palgrave, 2013. 5-38. Print.