U.S. ECONOMY, 1992.   Term Paper ID:20052 Click to get this paper

Essay Subject: Unemployment, exchange rate, recovery, discount rate, Federal Reserve, monetary policy, taxation, deficit, global aspects, trade.... More...

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Paper Abstract: Unemployment, exchange rate, recovery, discount rate, Federal Reserve, monetary policy, taxation, deficit, global aspects, trade. Paper Introduction: The American economy has been in the forefront of this election year. It is one issue which directly affects every voter, and it is an issue on which every voter has an opinion. Each of the three major candidates outlined a plan for economic recovery, recognizing that the United States is in a recession. President Bush referred to Governor Clinton as likely to be a "tax and spend" president, emphasizing that Democrats traditionally take a strong fiscal approach to the economy. President Franklin Roosevelt and the many public spending projects that his administrations undertook typify this approach. Republican presidents, on the other hand, are known for favoring monetary policy and maintaining a strong "free market" stance. The tax cuts of the Reagan administrations during the 1980s typify this approach (Kynaston 32). Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. GDP increased5.1 percent from 1989 to 199 , 2.8 percent from 199 to 1991 and 3.8percent from 1991 to 1992 ("Current ..." 7). In 1981, the prime stood at a hefty 2 .5 percent, but it hasmirrored the discount rate's fall. Inaddition to military spending, the government awards numerous contracts forgoods and services, all of which goes to stimulate the private sector. The American workforce is alreadylooking at high unemployment; if the American military begins acceptingfewer recruits, or encourages early retirement and discourages re-enlistment, it will result in additional working age Americans in need ofgainful employment. The public has voiced its dissatisfaction with the threatof additional tax increases. Such price movement can be devastating toAmerican products. Republican presidents, on the other hand, are knownfor favoring monetary policy and maintaining a strong "free market" stance. Events in Europe have other effects, as well. These workersdecrease the unemployment rate and feed additional dollars into the systemand the cycle of growth returns. Since World War II, the American economy has followed certain cyclesthat are likely to continue, at least for the next several decades(Kynaston 458). Successful and sustained economic recovery is likely to come aboutthrough careful management and balancing of all three of these tools:fiscal policy, monetary policy, and trade policy. Consumers do not behave aseconomists would like them to, and government officials are subject topressures from the electorate that may result in half-heartedimplementation of fiscal policy. Low interest rates(monetary policy) can be coupled with tax incentives for new investment(fiscal policy) and decreased trade barriers for new markets (trade policy)to create both the supply and the demand for goods and services.Emphasizing any of these areas to the detriment of the others may wellresult in a less than optimal recovery, and a shortened recovery cycle. Pension fundsmanagers, who control a large percentage of available funds in the country,are moving some of their funds out of investments with low-yields, and intobonds and commercial paper with higher yields. Recent global events have also raised issues that were not present inprevious recessions. The large budget deficit requires large interest payments relative tothe economy as a whole. The prime rate is the interest rate that bankscharge their best customers. When the Fed lowers its discount rate, and when the prime rate drops,the theory is that there will be an increase in borrowing as commercial andretail customers take advantage of the lower rates. Dubuque, Iowa: Wm. It is one issue which directly affects every voter, and it is an issue onwhich every voter has an opinion. The tax cuts of the Reagan administrations during the 198 s typify thisapproach (Kynaston 32). For example, retirees who have assumed a certain minimum interestrate for their retirement funds are finding that they are having a moredifficult time than they originally forecasted. With a discount rateof three percent, there is little leeway for the Fed to adjust the rate.Instead, the Fed may rely on other tactics, consisting of regulating themoney supply plus fiscal policies enacted by the new president. It would also create a trading unit that is larger both inpopulation and in funding than the European community. This is the percentage of deposits whichfinancial institutions are required to keep on hand, in reserve. In fact, the 198 s saw a steady decline in the discountrate from 13 percent in 1981 to 3 percent in 1992. This decreases the amount of money which is available to belent. President Franklin Rooseveltand the many public spending projects that his administrations undertooktypify this approach. Thisagreement would seek to eliminate tariff and nontariff barriers to tradeamong the three nations, and would establish the second large regionaltrading bloc. The other tool is fiscal (tax)policy. As the economy recovers, it is likely that the two key interestfigures, the discount rate and the prime rate, will increase (Epstein 1 ).The discount rate is the interest rate that Federal Reserve banks chargemember banks for funds. The money supply M1 (currency plus demand deposits) has risensteadily since 1989. A new factor which entered the Americaneconomy during the 198 s is the large debt, both personal and public, whichnow characterizes the American economy. Unfortunately, the American economy does not always perform aseconomic textbooks suggest that it should. Notonly is the goverrment looking at decreasing the manpower of the military,but demand military hardware, such as planes, tanks, computers and otherequipment can be expected to decline. This puts the government in the position ofpossibly having to cut programs in order to reduce its spending levels andhence reduce the deficit (Spiers 22). Works Cited"American Business Abroad." Financial World 16 (June 25, 1991), 44-45."Current Statistics." Standard and Poor's Statistical Service. The Deuschemark (Germany) and yen(Japan) are the two other dominant currencies. Foreign exchange is important becauseAmerican goods can become relatively more expensive to foreign goodsdepending on the exchange rate. For example, onApril 3 , 1991, the discount rate went from 6 to 5.5 percent. This can bedemonstrated most recently by the move to refinance mortgages by a largenumber of homeowners. American companies are particularlyinterested in the opening of Mexican markets. During the same period, the consumer price indexclimbed from a low of 127.4 in January 199 to a high of 14 .2 in June 1992(1982-1984 = 1 )("Current ..." 12) and the gross domestic product (GDP)increased from 525 .8 billiondollars in 1989 to 5893.6 billion dollars (projected) in 1992. Of course, theseinstruments also carry additional risk. The United States is no longer an economy which is self-contained. In addition to interest rates and money supply, the Fed also controlsthe reserve requirement. During recent years, the largest areaof expenditure in the American economy has been in the military. These economic figures can be expected to improve over the next 12months as the nation emerges from the economic slump it has been in.Unemployment levels will drop as the economy recovers and companiesreinvest in human resources. Ascompanies receive government contracts, they purchase equipment necessaryto complete the contract and hire the requisite workers. Investors are turning to other investmentinstruments which have higher yields than those available from banks andsavings and loans. There were slight (halfpercent) increases in early 1984, and again in late 1987 and early 1988,but the trend since 1981 has been downward. For its part, the United States is involved in negotiating a NorthAmerican Free Trade Agreement (NAFTA) with Canada and Mexico. Over the coming year, there is likely to be an increase in thediscount rate, resulting in a parallel increase in the prime rate. This requires additional capital equipment and additionalpersonnel. There can be unforeseen consequences of drops in interest rates, aswell. On May 1,1991, the prime rate fell to 8.5 percent. Principles of Economics. There were slight upsurges in 1984, andagain in 1987 and 1989, but the prime rate fell to 6 percent in July 1992("Current ..." 4). This income is put intothe economy directly by purchasing goods and services, or it is put intobanks and savings and loans where it can be loaned out again. C. The emergence of theEuropean Community (EC) as an economic bloc has significant overtones forAmerican companies. In this case, the companieshope to accomplish what tax cuts are designed to accomplish: additionaldemand for goods in the Mexican market means that additional goods must beproduced. Long-term, the American economy will likely see a repeat of the cycle which hascharacterized the economy since the end of World War II. Additional personnel then have the incomes necessary topurchase houses and can possibly put some of their income into savings.The goal is a cycle of growth. These are dollars that could otherwise be used tofund tax cuts or pay for gover=ent contracts. Any of these endeavors is expected to provide a rate ofreturn higher than the rate at which the funds were originally borrowed(Fleisher 212). While recent elections (such as that in France)suggest that a single European currency is unlikely to emerge soon, thepower of the EC both as a supplier and as a customer should be carefullyregarded. Of prime concern to many voters is the rate of unemployment, whichhas climbed from a low of 5.1 percent in 199 to 7.7 percent in June 1992("Current Statistics" 9). On November 7,1991, the prime rate fell to 7.5 percent ("Current ..." 4). NAFTA is notuniversally accepted, however, and some labor leaders expect a loss ofAmerican jobs rather than an increase. These cycles are characterized by periods of recessionfollowed by periods of growth. It is unlikelythat interest rates will climb to the levels seen in the early 198 s (13percent discount rate, 2 percent prime rate), but an increase to doubledigit interest rates is likely to occur within the 199 s (Epstein 12). The Federal Reserve is unlikely to decrease the discount rate muchfarther even in an effort to stimulate the economy. 2 in August 1992, an increase of 18 percent. While thisrepresents absolute growth of 12.2 percent from 1989 through 1992, theannual rates of change show a decline and slowdown in GDP. While it can be argued that thesejobs would have been lost to foreign competition or to companies relocatingto Asia, the effect on the workforce remains a consideration in any freetrade agreement negotiated on the continent ("American Business Abroad"44). Duringthe same time, the yen moved from .6474 US cents to .79 8, an increase of22 percent ("Current ..." 27). There is a perceptionthat banks and savings and loans are unable to adequately manage theirfunds with the guidelines already in place, and any move which putsinstitutions at potentially more risk, as lowering the reserve requirementwould, is likely to be met with opposition. Thus while funds are available at less of an interest rate thanpreviously, there are fewer funds available. The American economy has been in the forefront of this election year. The EC is likely to realizelower costs as a result of reduced trade barriers, and American companiescan expect increased competition from the new trading bloc. The Deuschemark moved from 58.58 US centsin March 199 to 69. Each of the three major candidatesoutlined a plan for economic recovery, recognizing that the United Statesis in a recession. Since 199 , both havegained at the dollar's expense. However, lower interest rates also mean that depositors receive lessof a return on their funds than previously, and they may seek differentinvestments. President Bush referred to Governor Clinton as likelyto be a "tax and spend" president, emphasizing that Democrats traditionallytake a strong fiscal approach to the economy. While the American military has long been a largebudget item, the recent political developments in Europe have brought intoquestion whether as large a military is necessary, or even desirable. It is unlikely that the Fed will reduce the reserve requirement formember banks. When large time deposits are added in (M3), however,the money supply has fallen during 1992, probably as a result of lowerinterest rates ("Current ..." 6). Another useful economic measurement is the strength of the dollarrelative to other world currencies. Although doing so would make additional funds available tobe lent out, the recent savings and loan crisis, and the potentialcommercial bank crisis, makes such a move unwise. In some cases, this isplacing additional burdens on local social service agencies which may befunded by already beleaguered state and local gover=ents. Brown, 1987.Kynaston, David. Taxation covers government revenue; the other area of fiscal policyis that of government expenditures. The American savings rate is already one of the lowestamong industrial nations, and this can be cause for additional concern(Epstein 8). At the commercial level, borrowed funds can beinvested in plants and equipment, in additional personnel, or in researchand development. "Relapse or Resurgence." Barron's 72 (August 31, 1992),8-15.Fleisher, Belton, Edward Ray and Thomas Kniesner. The prime rate, as expected,has followed. Asadditional goods are purchased, suppliers have to manufacture more to meetthe demand. American companies export to foreign countries, and holdownership positions in foreign companies. In addition to providing lower costs for manufacturing labor, thereduction of tariffs and quotas opens up the markets of all threeparticipants in NAFTA to each other. London: Viking, 1988.Spiers, Joseph. The Federal Reserve has decreased the discount rate to the lowestpoint since 1981. The Reagan administration worked largely on this principle: bycutting taxes, there is more disposable income. "Still No Triple Dip in Sight." Fortune 126(September 21, 1992), 21-22.----------------------- 6 The problem that this high levelof debt causes is that an abnormally high level of GDP must be spent merelyservicing the interest payment on the debt; this money would otherwise beavailable to put into other places within the economy. Similarly, on November 7, 1991,the discount rate fell from 5.5 percent to 4.5 percent. Changes in the discount rate are typicallyquickly followed by similar changes in the prime rate. Additional revenue from the sales of these goods makesadditional capital available for re-investment. This is most obvious in thedecrease of long-term deposits. New York: Standard and Poor's Corporation, September 1992.Epstein, Gene. The deficit also makes itdifficult for the government to raise the additional money it would need tofund new growth. Monetary policy is only one economic tool which can be used tostimulate or retard economic growth. The Financial Times. Gross domestic product will lead whateverrecovery takes place, and an increase in the annual rate of change over the1991-1992 period can be expected, although a return to the 5.1 percentexperienced in 1989-199 forthe 1992-1993 period (Spiers 21). Thus, in addition tomonetary policy and fiscal policy, foreign trade policy also becomesincreasingly important in today's global economy. 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