Economy of the United States

Economy of the United States

The United States has the largest national economy in the world, with a
GDP for 2005 of 12.41 trillion dollars. In this mixed economy,
corporations and other private firms make the vast majority of
microeconomic decisions, and governments prefer to take a minimal role
in the domestic economy. Because of this, the U.S. has a small social
safety net, and business firms in the U.S. face considerably less
regulation than those in many other nations. The fiscal policy of the
nation since the New Deal has followed the general ideals of Keynesian
economics, which replaced Hamiltonian economics following the Great
Depression. Neoliberal ideals have become more prominent since the
presidency of Ronald Reagan and with the growing influence of
globalization. Since the early 1980s, the United States has transformed
from being the world’s largest creditor to having a substantial current
account deficit and a national debt, which is now approximately 64% of
the GDP and the highest since the 1950s.

History

With President Harding’s post–World War I “Return to Normalcy”, the
United States enjoyed a period of great prosperity during the 1920s. The
stock market grew by leaps and bounds, fueled by the inflationary
policies of the Federal Reserve, and the economy was considered
invincible. However, the Great Depression shattered that belief.
President Franklin D. Roosevelt introduced an array of social programs
and public works, known collectively as the New Deal. The New Deal
included a new social safety net involving relief programs like the WPA
and the Social Security system. In 1941, the U.S. entered World War II.
The home front saw enormous prosperity, as labor shortages brought
millions of housewives, students, farmers and African Americans into the
labor force. Millions moved to industrial centers in the North and West.
Military spending accounted for over 40% of GDP at the peak, driving
debt up to record levels. The post–World War II years were a time of
great prosperity in the United States. The economy remained stable until
the 1970s, when the U.S. suffered stagflation. Richard Nixon took the
United States off the Bretton Woods system, and further government
attempts to revive the economy failed. As the decade progressed, the
situation worsened. In November 1980, Robert G. Anderson wrote, “the
death knell is finally sounding for the Keynesian Revolution.” Ronald
Reagan was elected President in 1980, and was of the opinion that
“government is not the solution to our problem, government is the
problem.” Reagan advocated a program of ‘supply-side economics’, and in
1981 Congress cut taxes and spending, and reduced regulations. Although
the Gross Domestic Product (GDP) declined by 2% in 1982, it proceeded to
rebound, and by 1988 had enjoyed a total of 31% growth since Reagan’s
election. Under Bill Clinton’s eight years of presidency, the GDP
expanded by 38%. By the end of his tenure the United States had a Gross
National Income (GNI) of $9.7 trillion, and the lowest unemployment
rates in 30 years. A recession began during 2000 in connection to the
end of the dot-com bubble. Throughout, housing starts and purchases
remained high, and the economy as of 2005 is considered by many to be
strong in general. Some fear high government spending (such as in the
Iraq War) as well as high oil prices may accelerate inflation. There are
also warnings that the Federal Government needs to re-balance the budget
to avoid potential default. While default does not appear a probable
outcome, it is highly likely that persistent high budget deficits will
drag down the economy in the future. This applies even more so to the
current account deficit and external debt. U.S. liabilities to
foreigners are estimated at $15 trillion in 2005, and continue to grow.

Basic ingredients of the U.S. economy

The first ingredient of a nation’s economic system is its natural
resources. The United States is rich in mineral resources and fertile
farm soil, and it is fortunate to have a moderate climate. It also has
extensive coastlines on both the Atlantic and Pacific Oceans, as well as
on the Gulf of Mexico. Rivers flow from far within the continent, and
the Great Lakes – five large, inland lakes along the U.S. border with
Canada – provide additional shipping access. These extensive waterways
have helped shape the country’s economic growth over the years and
helped bind America’s 50 individual states together in a single economic
unit.

The second ingredient is labor. The number of available workers and,
more importantly, their productivity help determine the health of an
economy. Throughout its history, the United States has experienced
steady growth in the labor force, and that, in turn, has helped fuel
almost constant economic expansion. Until shortly after World War I,
most workers were immigrants from Europe, their immediate descendants,
or African Americans who were mostly slaves taken from Africa, or slave
descendants. Beginning in the early 20th century, many Latin Americans
immigrated; followed by large numbers of Asians following removal of
nation – origin based immigration quotas. The promise of high wages
brings many highly skilled workers from around the world to the United
States.

Labor mobility has also been important to the capacity of the American
economy to adapt to changing conditions. When immigrants flooded labor
markets on the East Coast, many workers moved inland, often to farmland
waiting to be tilled. Similarly, economic opportunities in industrial,
northern cities attracted black Americans from southern farms in the
first half of the 20th century.

Third, there is manufacturing and investment. In the United States, the
corporation has emerged as an association of owners, known as
stockholders, who form a business enterprise governed by a complex set
of rules and customs. Brought on by the process of mass production,
corporations such as General Electric have been instrumental in shaping
the United States. Through the stock market, American banks and
investors have grown their economy by investing and withdrawing capital
from profitable corporations. Today in the era of globalization American
investors and corporations have influence all over the world. The
American government has also been instrumental in investing in the
economy, in areas such as providing cheap electricity (such as the
Hoover Dam), and military contracts in times of war.

While consumers and producers make most decisions that mold the economy,
government activities have a powerful effect on the U.S. economy in at
least four areas. Strong government regulation in the U.S. economy
started in the early 1900s with the rise of the progressive movement;
prior to this the government promoted economic growth through protective
tariffs and subsidies to industry, built infrastructure, and established
banking policies, including the gold standard, to encourage savings and
investment in productive enterprises.

Stabilization and growth

Perhaps most importantly, the federal government guides the overall pace
of economic activity, attempting to maintain steady growth, high levels
of employment, and price stability. Adjusting spending and tax rates
(fiscal policy) or managing the money supply and controlling the use of
credit (monetary policy), it can slow down or speed up the economy’s
rate of growth-in the process, affecting the level of prices and
employment.

For many years following the Great Depression of the 1930s, recessions –
periods of slow economic growth and high unemployment – were viewed as
the greatest of economic threats. When the danger of recession appeared
most serious, government sought to strengthen the economy by spending
heavily itself or cutting taxes so that consumers would spend more, and
by fostering rapid growth in the money supply, which also encouraged
more spending. In the 1970s, major price increases, particularly for
energy, created a strong fear of inflation – increases in the overall
level of prices. As a result, government leaders came to concentrate
more on controlling inflation than on combating recession by limiting
spending, resisting tax cuts, and reining in growth in the money supply.

Ideas about the best tools for stabilizing the economy changed
substantially between the 1960s and the 1990s. In the 1960s, government
had great faith in fiscal policy-manipulation of government revenues to
influence the economy. Since spending and taxes are controlled by the
president and the U.S. Congress, these elected officials played a
leading role in directing the economy. A period of high inflation, high
unemployment, and huge government deficits weakened confidence in fiscal
policy as a tool for regulating the overall pace of economic activity.
Instead, monetary policy-controlling the nation’s money supply through
such devices as interest rates-assumed growing prominence. Monetary
policy is directed by the nation’s central bank, known as the Federal
Reserve Board, with considerable independence from the president and the
Congress.

Regulation and control

The U.S. federal government regulates private enterprise in numerous
ways. Regulation falls into two general categories.

Economic regulation: Seeks, either directly or indirectly, to control
prices. Traditionally, the government has sought to prevent monopolies
such as electric utilities from raising prices beyond the level that
would ensure them reasonable profits. At times, the government has
extended economic control to other kinds of industries as well. In the
years following the Great Depression, it devised a complex system to
stabilize prices for agricultural goods, which tend to fluctuate wildly
in response to rapidly changing supply and demand. A number of other
industries-trucking and, later, airlines-successfully sought regulation
themselves to limit what they considered as harmful price cutting.

Another form of economic regulation, antitrust law, seeks to strengthen
market forces so that direct regulation is unnecessary. The
government-and, sometimes, private parties – have used antitrust law to
prohibit practices or mergers that would unduly limit competition.

In 1933, Congress created the Federal Deposit Insurance Corporation
(FDIC) which presently guarantees checking and savings deposits in
member banks up to $100,000 per depositor to prevent bank failures. This
was in response to the widespread bank runs of the early 1930s during
the Great Depression.

Social Regulations: Since the 1970s, government has also exercised
control over private companies to achieve social goals, such as
protecting the public’s health and safety or maintaining a clean and
healthy environment. The U.S. Food and Drug Administration tightly
regulates what drugs may reach the market. For example, the Occupational
Safety and Health Administration protects workers from hazards they may
encounter at their workplace and the Environmental Protection Agency
seeks to control water and air pollution.

Such agencies draw heavy criticism from conservatives, who question the
agencies’ efficiency and necessity.

American attitudes about regulation changed substantially during the
final three decades of the 20th century. Beginning in the 1970s, policy
makers grew increasingly concerned that economic regulation protected
inefficient companies at the expense of consumers in industries such as
airlines and trucking. At the same time, technological changes spawned
new competitors in some industries, such as telecommunications, that
once were considered natural monopolies. Both developments led to a
succession of laws easing regulation.

While leaders of America’s two most influential political parties
generally favored economic deregulation during the 1970s, 1980s, and
1990s, there was less agreement concerning regulations designed to
achieve social goals. Social regulation had assumed growing importance
in the years following the Depression and World War II, and again in the
1960s and 1970s. But during the presidency of Ronald Reagan in the
1980s, the government relaxed rules intended to protect workers,
consumers, and the environment, arguing that regulation interfered with
free enterprise, increased the costs of doing business, and thus
contributed to inflation. Still, many Americans continued to voice
concerns about specific events or trends, prompting the government to
issue new regulations in some areas, including environmental protection.
As of March 2005, it is estimated that compliance with government
regulation costs the U.S. economy $1.4 trillion a year. Some citizens,
meanwhile, have turned to the courts when they feel their elected
officials are not addressing certain issues quickly or strongly enough.
For instance, in the 1990s, individuals, and eventually government
itself, sued tobacco companies over the health risks of cigarette
smoking. A large financial settlement provided states with long-term
payments to cover medical costs to treat smoking-related illnesses. The
money is mostly spent (or will be spent, as checks are often written in
anticipation of payments) for other purposes.

Direct services

Each level of government provides many direct services. The federal
government, for example, is responsible for national defense, backs
research that often leads to the development of new products, conducts
space exploration, and runs numerous programs designed to help workers
develop workplace skills and find jobs. Government spending has a
significant effect on local and regional economies and even on the
overall pace of economic activity.

State governments, meanwhile, are responsible for the construction and
maintenance of most highways. State, county, or city governments play
the leading role in financing and operating public schools. Local
governments are primarily responsible for police and fire protection.
Government spending in each of these areas can also affect local and
regional economies, although federal decisions generally have the
greatest economic impact.

Overall, federal, state, and local spending accounted for almost 28
percent of gross domestic product in 1998.

Direct assistance

Government also provides many kinds of help to businesses and
individuals. It offers low-interest loans and technical assistance to
small businesses, and it provides loans to help students attend college.
Government-sponsored enterprises buy home mortgages from lenders and
turn them into securities that can be bought and sold by investors,
thereby encouraging home lending. Government also actively promotes
exports and seeks to prevent foreign countries from maintaining trade
barriers that restrict imports.

Government supports individuals who cannot or will not adequately care
for themselves. Social Security, which is financed by a tax on employers
and employees, accounts for the largest portion of Americans’ retirement
income. The Medicare program pays for many of the medical costs of the
elderly. The Medicaid program finances medical care for low-income
families. In many states, government maintains institutions for the
mentally ill or people with severe disabilities. The federal government
provides food stamps to help poor families obtain food, and the federal
and state governments jointly provide welfare grants to support
low-income parents with children.

Many of these programs, including Social Security, trace their roots to
the “New Deal” programs of Franklin D. Roosevelt, who served as the U.S.
president from 1933 to 1945. Key to Roosevelt’s reforms was a belief
that poverty usually resulted from social and economic causes rather
than from failed personal morals. This view repudiated a common notion
whose roots lay in New England Puritanism that success was a sign of
God’s favor and failure a sign of God’s displeasure. This was an
important transformation in American social and economic thought. Even
today, however, echoes of the older notions are still heard in debates
around certain issues, especially welfare.

Many other assistance programs for individuals and families, including
Medicare and Medicaid, were begun in the 1960s during President Lyndon
Johnson’s (1963–1969) “War on Poverty.” Although some of these programs
encountered financial difficulties in the 1990s and various reforms were
proposed, they continued to have strong support from both of the United
States’ major political parties. Critics argued, however, that providing
welfare to unemployed but healthy individuals actually created
dependency rather than solving problems. Welfare reform legislation
enacted in 1996 under President Bill Clinton (1993–2001) requires people
to work as a condition of receiving benefits and imposes limits on how
long individuals may receive payments.

National debt

The national debt, also known as the U.S. public debt and the gross
federal debt, is the overall collective sum of yearly federal budget
deficits owed by the United States federal government. The economic
significance of this debt and its potential ramifications for future
generations of Americans are controversial issues in the United States.

The borrowing cap debt ceiling as of 2005 stood at 8.18 trillion. In
March of 2006, Congress raised that ceiling an additional .79 trillion
to $8.97 trillion. Congress has used this method to deal with an
encroaching debt ceiling in previous years, as the federal borrowing
limit was raised in 2002 and 2003. The size of the debt is in the
trillions and consequently it has been part of popular culture to parody
the growing debt with some type of doomsday clock, graphically showing
the growing indebtedness every second.

While the U.S. national debt is the world’s largest in absolute size, a
more accurate measure is that of its size relative to the nation’s GDP.
When the national debt is put into this perspective it appears
considerably less today than in past years, particularly during World
War II. By this measure, it is also considerably less than those of
other industrialized nations such as Japan and roughly equivalent to
those of several Western European nations.

Poverty

This graphic shows the distribution of gross annual household income.
The building’s thirty exposed floors are easily divided into quintiles,
each income quintile is thereby represented by six floors. Each floor
represents the tenth of a third (3.33%) of households in the US and each
section of 10 floors represent roughly one third of American society.
The floors above the top black line represent those households with
incomes of or exceeding $100,000. The floors below the bottom black
line, however, represent those households who fell below the poverty
threshold. In order to live on the top floor of the American income
strata, a household’s annual gross income must exceed $200,000.There is
significant disagreement about poverty in the United States,
particularly over how poverty ought to be defined. Using radically
different definitions, two major groups of advocates have claimed
variously that (a) the United States has eliminated poverty over the
last century; or (b) it has such a severe poverty crisis that it ought
to devote significantly more resources to the problem.

The two preceding definitions of poverty are very different because one
group defines poverty as a lack of basic resources. Even with over 300
million people, The United States has a very low number of people who
lack basic necessities (e.g., food, shelter and clothing). The other
group argue that income inequality is providing the richest 10% with a
much better standard of living than the poorest 10%.Much of the debate
about poverty comes from groups who either support welfare programs and
government regulation of the market or a market which is regulation free
and not bound by a big social safety net. Measures of poverty can be
either absolute or relative. Absolute poverty is defined in real dollar
values, whereas relative poverty is a comparison of the highest to the
lowest standard of living at a particular time period.

Income inequality

The United Nations Development Programme Report 2005 ranks income
distribution in the United States as the 92nd most equal out of 124
countries, as measured by the Gini coefficient. The richest 10% make
15.9 times as much as the poorest 10%, and the richest 20% make 8.4
times as much as the poorest 20%. (See List of countries by income
equality.)

This does not take into account absolute income levels. If, for
instance, one country’s poorest are richer than another country’s
average, then the inequality comparison becomes less meaningful.

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