Current Macroeconomic Issues And Recommendations
As an economic advisor to the new president elect, I would tackle the most pressing macroeconomic issues that have the greatest impact on the rest of the economy. This would be unemployment and the energy crisis. This paper thus analyzes the current situation in the above areas and makes recommendations to the president elect on how he should handle the situation. Unemployment In recent times unemployment in the US has been a very sensitive issue with the number of the unemployed going up every day. The Bureau of Labor Statistics reported that unemployment levels were up to 6.
7% (10. 3 million of the labor force) as of November this year showing an increase of 0. 2% from 6. 5% as of October (http://www. bls. gov/news. release/empsit. nr0. htm). There seems to be no hope in the short run that the situation will improve to give the Americans the much needed source of income as inflation levels bite. Nearly a half of those who have had their employment terminated have no hopes of being recalled back to work. This shows that they have lost hope in the economy. Such minor speculations have had their implications being felt far and wide.
In one way or another for example, such people who have lost their employment they are saving their earnings for tougher times ahead instead of spending the money that will keep the earnings in circulation within the economy and spur growth. Considering the economics of the labor market we can have to perspective on the current unemployment situation in America. Classical economists propose that unemployment results from the fact that the wage rates being offered in the market are too high above the equilibrium market wage rates (Ison and Wall, 2007). As a result firms will have increased costs of production and might be forced to close down.
They also propose that it occurs due to structural adjustments in certain industries that affect the labor market bring about what we call structural unemployment. Such adjustments could be attributed to lifecycle of industries either under the influence of technology of trends and culture. For example, in the 1980’s there was a sharp decrease in the coal and steel industry globally thereby bringing about structural unemployment. The credit crunch ailing the US economy currently has mean that there is very little capital for investment by firms. Thus there has been reduced production and workers are being laid off.
Going by what the Bush administration has been doing, it would be argued that the intent is right but maybe the political good will and faith in the government has failed. The economic stimulus bill has been passed and put into practice and failing financial institutions have been bailed out by the government. Seemingly, this has not been enough to bring firms back into full production and increase the demand for labor and thereby help in reducing unemployment. Going by the classical argument, then it would seem that new unemployment policies should aim at lowering existing real wage rates (Ison and Wall, 2007).
This can be done through two ways. Increasing labor supply to lower the real wage rate or imposing a minimum wage rate below the market equilibrium wage rate. Increasing labor supply in some way would mean relaxing some of American immigration laws. In addition to this reducing classical unemployment can be done through reducing the bargaining power of trade unions in order to keep real wage rates down. On the other hand, Keynesian economics propose that unemployment results from a fall in aggregate demand that will not allow full employment.
A fall in aggregate demand in this context is recognized to arise from an economic recession. Energy crisis The US is the leading power in the globe economically and militarily. Her position in the globe makes her one of the most lucrative markets that are targeted by other countries due to the high income per capita and the strength of the dollar against other major foreign currencies. Unfortunately, her inability to take full control of her energy needs has exposed the country to intense economic pressures over time.
According to Ison and Wall, (2007), the US consumes 25% of the world’s total oil production but only produces 4% of her own with the rest being imported from the OPEC. Technological limitations have hampered the substitutability of oil and thus being a natural resource has granted nations with vast oil reserves some natural monopoly. As such, these countries have been imposing prices on buyer countries such as the US. Through the multiplier effect, the impact on the whole economy has been very forceful with costs of production for firms shooting up.
The cost of living has also gone up. New dimensions in technology have targeted clean coal technology, nuclear energy, solar energy and wind energy as relatively cheaper and more environmentally friendly substitutes to petroleum products. The economic relationship between substitutes dictates that a fall in the price of one will automatically lead to a fall in demand of the relatively expensive option as consumers/buyers switch to the relatively cheaper alternative if the level of utility is maintained or the change in utility realized is minimal.
Therefore, policies that Mr. Obama should enact should be aimed at accelerating invention and investment into the cheaper sources of energy. According to Parkin, Powell and Mathews (2007), the oil market is heavily run by speculation and roll return. The writer defines this as the difference between the current spot price and the futures contract price According to a report released by two Senate members back in 2006, the findings were that there should be more control on the oil market by the government (http://www.
senate. gov/~levin/newsroom/release. cfm? id=257862). Such oil market regulation may be against the ideals of a free market economy but the government should serve its purpose by protecting the people from exploitation. Unfortunately, tight market regulation such as in the housing market through rent ceiling have shown that in the long term they have a negative effect, while at the same time they have demonstrated that they could serve well in the short run (Parkin et al, 2007).
Therefore, your government Sir should consider oil market regulation to a considerable level should the oil crisis hit again or the prices fail to stabilize though currently they have stabilized a bit. According to the Levin-Coleman report, observations done since the turn of the millennium show that market speculators have poured tens of billions of dollars into the petroleum and petroleum products market as an investment on roll return. Between 2003 and 2006, the International Monetary Fund indicates that approximately $100-$120 billion was invested in energy markets worldwide.
Out of this, $60 billion was devoted to oil futures on the NYMEX. (http://www. senate. gov/~levin/newsroom/release. cfm? id=257862) Academicians in this market strongly believe that middle men in this industry who invest in futures are responsible for high oil prices from time to time (Ison and Wall, 2007).. This happens in spite of the government maintain high oil inventories which as of 2004 had hit 347 million barrels. The same report also shows that these roll return investors add around $20 per barrel on top of the actual market price (http://www.
senate. gov/~levin/newsroom/release. cfm? id=257862). Therefore, more regulation and control mechanism in this area should ensure that the new government protects the economy from exploitation by a few middle men. References Ison, S. and Wall, S. (2007) Economics, (London, Prentice Hall) Kalt, J, The economics and politics of oil price regulation Journal of international Economic Review, 2006 Parkin, M. , Powell, M. and Matthews, K. (2007), Economics (Boston, Addison Wesley) “The oil market and economics 101” at http://www. mees.
com/postedarticles/oped/v49n44-5OD02. htm “Inflation and consumer spending” at, <http://www. dol. gov/dol/topic/statistics/inflation. htm> Economic Data, The Economist Accessed on line at, http://www. economist. com/countries/usa/profile. cfm? folder=Profile-Economic%20Data, (Accessed on 2nd Dec 2008) Bureau of Labor Statistics at, http://www. bls. gov/news. release/empsit. nr0. htm Levin-Coleman Report Finds Speculation Adding To Oil Prices: Put the Cop Back on the Beat, http://www. senate. gov/~levin/newsroom/release. cfm? id=257862
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