Economic Growth and Unemployment Rate After the Us Financial Crisis: A Review of Leonhardts (2011) “a Mission Not Yet Accomplished”
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Economic Growth and Unemployment Rate after the US Financial Crisis:
A Review of Leonhardts (2011) “A Mission Not Yet Accomplished”
Introduction
Everyone lends a watchful eye on the state of the US economy. After all, it is the worlds largest economy. It has maintained that spot since 1870s. And when the financial crisis hit the country back in 2007, the rest of the worlds economies came tumbling down with it. All over the world, companies are closing, people are getting unemployed, and the average persons purchasing power plummeted. In addition, consumer confidence fell and the public sees economic growth as bleak.
Four years later, the US economic scene is revisited in the article of David Leonhardt (2011) in the New York Times. Prior to this writing, several reviews of the state of the US economy were conducted. On March 31, 2009, a panel of five (5) MIT (Massachusetts Institute of Technology) panelists discussed how far along the road to recovery is the US economy. One of the panelists, William Wheaton, declares that theres a little light at the end of the housing prices tunnel (Mangelsdorf, 2009). Back in 2008, he predicted that housing prices will not stabilize until 2011 or 2012; his statement then shows slight confidence in the US economy. On another note, a review by Reinhart and Rogoff (2008) indicates the deep and lasting effects of the financial crisis on asset prices, output and employment. They continue to note that unemployment rate will continue to rise for five years and housing prices will continue to decline for six years.
Economic Growth Seems to be Stalling
Leonhardts “A Mission Not Yet Accomplished” evaluates the current state of the US economy vis-a-vis the 2007 financial crisis. His article focuses on the fact that currently, “recovery seems to be at a risk of stalling” (Leonhardt, 2011, n. pag.). Figures suggest that the annual economic growth rate is only at 1.8%, almost identical to the previous years 1.7%. Both figures indicate that while there is growth in the economy, such is so minimal and looks to be on a steady pace. This doesnt come as good news for both the US government and the people, because this only means that businesses will still be conservative, jobs will still be scarce and government debt will still be high. Add to this the results of last months New York Times/CBS News Poll, then one would be slightly disheartened because about 80% evaluate the economy as in fairly bad or very bad shape. This only signifies that the average American, not necessarily an expert in economics, feels that the economy is not at all improving. People do not even feel the 1.8% reported economic increase. This suggests that four years after the financial crisis, people are still feeling the aftermath of the situation.
Unemployment Rate
As stated by economists Reinhart and Rogoff (2008), unemployment rate is expected to continuously increase for a period of five years. At present, the unemployment rate is at 8.9% (Homan, 2011), the lowest registered rate in the last two years. While this figure may seem to be a piece of good news, the fact is that it still is a very high rate. Back in 2009, the unemployment rate was at 7.2% and it was dubbed as a 16-year-high (Uchitelle, 2009), so imagine the number of people with no jobs at the current rate of 8.9%! According to Federal Reserve Chairman Ben Bernanke (as cited in Leonhardt, 2010), the unemployment rate will not fall below 5% for another five years. Yet regardless of how bleak this forecast seems to be, there is a macroeconomic reason for this.
Federal Reserve officials settled on having a high unemployment rate in an effort of keeping market confidence high (Leonhardt, 2010). This is a risk that they have to take to prevent market panic. When market confidence is high, investors are willing to lend the US government money at ground-level interest rates despite enormous budget deficits. When market confidence is high, loans are easy to acquire and investors are more than willing to put their money in some endeavor. When market confidence is low, however, market panic results, interest rates shoot up, banks are reluctant to lend, and the whole banking system ceases to function efficiently (Karsenti, n.d.). The public panics and in no time, the whole economy would collapse.
So what is the role of the Federal Reserve in unemployment? Remember basic economics: inflation and unemployment are inversely related, meaning if inflation is high, unemployment is low; if inflation is low, unemployment is high. In addition, inflation is caused by an increase in money supply either because of the Federal Reserve acquiring more assets or because of private institutions demanding more money to support their operations. Also keep in mind that the “Federal Reserve is responsible for controlling the money supply in the United States” (“Money,” 2005, n. pag.). Currently, the Federal Reserve purchased $2.3 trillion worth of assets and according to Bernanke (as cited in Nasiripour, 2011), this was done to keep interest rates at a minimum, which in turn could drive borrowing and spending. This aggressive strategy by the Federal Reserve keeps interest rates low so investors will still be willing to lend the US government money. Leonhardt (2010) describes this action as proof of the fact that policy makers are doing the best they can in resolving the financial crisis, even willingly accepting a near-to-ten-percent unemployment rate to counter