Q&A for an online Business Review course I’m taking in order to graduate. Topic is pertaining to a Macroeconomic viewpoint of our current economic dilemma, providing me with a perfect soap box to spout my views
Now the three part question:
1. Is the US economy in a recession, inflation, or pretty-much in equilibrium?
2. Explain your answer. That is, give reasons why you believe that we are in a recession, inflation, or about as good as it gets.
3. If we are in a recession or inflation, please indicate what you would do if you had the power to fix the problem. In other words, would you raise tax, lower spending, increase the money supply, etc.? Please remember, “analysis.”
Answer:
1. Currently, the US is in the midst of a recession and is bordering on an inflationary period.
2. Their are several reasons for this. First of all, with unemployment at 10%, it is almost double what the government considers an acceptable level. It has increased 2.4% this year alone, and 5.5% month over month since 2006 according to the Bureau of Labor and Statistics. Second, also according to data from the BLS, all major economic indicator categories have steadily fallen over the last few years. From Oct of 2005 to Oct of 2009, the Consumer Price Index has fallen from 4.3 to -.2, the Producer Price Index has gone from -.5 to -.6, and the Employment Cost Index for civilian wages has fallen from .7 in the 3rd quarter of 2005 to .4 in the 3rd quarter of 2009. With all of these economic numbers indicating a recession, coupled with this administrations policy of attempting to tax and spend our way out of it, we are destined to repeat the high inflation and interest rates of the late 1970’s and early 1980’s. Currently, the Federal Reserve has been hastily printing money and, depending on who’s numbers you believe and if you look at the Fed’s M1, M2, or M3 numbers, may have increased our domestic monetary supply as much as 15 times(http://www.marketskeptics.com/2009/03/fed-is-planning-15-fold-increase-in-us.html).
This will lead to a drastic de-valuation of our dollar, which will decrease consumer spending power and increase the rate of inflation. Consequently, the only way to combat inflation is to raise interest rates, and with the Federal Funds rate at .25%, there’s no place to go but up. There are other indicators pointing towards inflation as well. When investors fear coming inflation, they tend to dump their money into the commodities market, and if you’ve noticed the price of gold and oil lately, you’ll see this trend is accurate. Gold has recently been trading as high as $1200 an ounce (kitco.com) and oil, despite record high surpluses and steadily decreasing demand is still trading at around $73 a barrel (www.oil-price.net). According to the Motley Fool, everything the government is doing right now is by definition inflationary, making double digit inflation rates a very real possibility (http://www.fool.com/investing/international/2009/04/23/is-us-hyperinflation-a-real-possibility.aspxwww.oil-price.net). According to the Motley Fool, everything the government is doing right now is by definition inflationary, making double digit inflation rates a very real possibility (http://www.fool.com/investing/international/2009/04/23/is-us-hyperinflation-a-real-possibility.aspx).
3. I believe it is impossible to tax and spend our way out of a recession. That type of thinking may work in the short run, but over time, it will lead to high inflation and possibly even deflation. I think the only way to successfully pull ourselves out of the economic quagmire we now currently face is a return to good old-fashioned Reaganomics. For those of you unfamiliar with this concept, it’s the economic policy Ronald Reagan used to reverse the high inflation and interest rates of the late ‘70’s and early 80’s, and it was basically comprised of 4 steps:
A) Reduce the growth of government spending
B) Reduce the marginal tax rates on income from both labor and capital
C) Reduce regulation
D) Reduce inflation by controlling the growth of the money supply
http://www.econlib.org/library/Enc1/Reaganomics.html
Now some might say that reducing regulation is what got us into this mess, and to a certain extent, they would be correct (the crash of the financial markets would be a good example). However, government intervention into every aspect of our economy has proven so far to be disastrous (see the bailout, the takeover’s of GM and Chrysler, the Cash for Clunkers program, etc), and I feel it’s painfully obvious that everything the government touches it tends to ruin. So I feel an economic policy that more closely resembles the one which was embraced by the Reagan administration is really the only thing that makes sense. After all, it’s shown that it has worked in the past, and it’s time to let the invisible hand start doing what it’s suppose to do.
