US Economy – Curtain raiser
The economic recovery in the United States has already been very fragile. And now with more layoffs, and a high number of applications for unemployment benefits, the fear of the United States heading back into recession has gripped experts and many other people alike.
US is under the uproar that it is again going into recession – double depression.
Many financial indicators are issuing worrisome signals, millions of people are still out of work, and growth is slowing.
Will the economy pick up momentum or slip back into recession? Unfortunately, the answer is very much in doubt.
Even the Federal Reserve chairman, Ben S. Bernanke, calls the current economic outlook “unusually uncertain.”
The major indicators for this situation are – debts and unemployment.
Debts
Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.
Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”
But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”
The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.
To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. Hence an immediate and permanent doubling of their personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act is needed.
Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.
‘Unofficial’ Liabilities
Referring CBO’s report’s data the calculated fiscal gap is $202 trillion which is more than 15 times the official debt. This gargantuan discrepancy between “official” debt and actual net indebtedness isn’t surprising.
US has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.
Recently, the federal government has been recording the largest budget deficits, as a share of the economy, since the end of World War II. As a result of those deficits, the amount of federal debt held by the public has surged. At the end of 2008, that debt equaled 40 percent of the nation’s annual economic output (as measured by gross domestic product). Since then, large budget deficits have caused debt held by the public to shoot upward; the Congressional Budget Office (CBO) projects that federal debt will reach 62 percent of GDP by the end of this year–the highest percentage since shortly after World War II. The sharp rise in debt stems partly from lower tax revenues and higher federal spending related to the recent severe recession and turmoil in financial markets. However, the growing debt also reflects an imbalance between spending and revenues that predated those economic developments.
Un-Employment
Numbers for Last year
All told, 2.6 million people lost their jobs in 2008. And, to underscore the accelerating nature of the problem, more than half of those job losses occurred in the final four months of the year. In December, a total of 11.1 million were unemployed. An additional 8 million people were working part time – up sharply from 7.3 million in November.
Those were the “official” government numbers. But, as a closer look demonstrates, the unemployment figures can be understated – and misleading.
The most commonly number quoted in the media is the “official” unemployment rate – known as U3 – which stood at 7.2%.
But to get the real picture, you have to add both in what the government refers to as “discouraged” workers (U4) and “marginally attached” workers (U5) – those who have stopped looking for work, or who haven’t looked for work recently. That number depicts an unemployment rate that’s approaching an eye-popping 14%.
And it gets worse. If you include the people that the government doesn’t even count – such as unemployed farm workers, the idle self-employed, and workers in private homes – the unemployment rate approaches an astonishing 18%
Present Scenario
It is considered that in an economy that is doing decently, 400,000 applications for jobless benefits is the norm. When the economic recession was at its worst, this figure went up to more than 650,000, which was in March ’09. Things got better and it declined at a steady pace, with July ’10 seeing a low of just 427,000. But the past few weeks have been bad again. The end of last week saw the highest since last year, touching the 500,000 mark.
The financial crisis has hit the U.S. labor market strongly, creating large regional disparities and unequally affecting different segments of the labor market. Not only have unemployment rates reached levels near post-World War peaks, but unemployment duration is at historic highs. The crisis affected some groups more severely, including men, youth, and low-skilled individuals and hit some sectors particularly hard, especially manufacturing, construction, and parts of the financial industry.
There are 9.2 million Americans that are unemployed but that are not receiving an unemployment insurance check.
A recent Pew Research survey found that 55 percent of the U.S. labor force has experienced unemployment, a pay decrease, a reduction in hours or an involuntary move to part-time work since the recession began.
Hence an effort to put some light on some real facts.
