The American Economy simplified for all levels. The United States has the highest Gross Domestic Product (GDP) of any nation in the world by far. However, the United States’ economy has become a service economy, moving away from manufacturing (Wilson, 2014). This trend has been significantly impacted by technology in the workforce.
The problem is that manufacturing companies are moving to Asia where operational cost is extremely low. In the process, countries in Asia, such as China benefit, while the American people arguably pay the price. However, manufacturing outsourcing is not something new.
True Cost of your iPhone
There are several reasons why American companies move their companies abroad. Some of the reasons to employ nonunion and extremely low-paid employees are to stay afloat in a capitalist and competitive market, and of course to increase revenue.
The problem is that when American companies move their factories abroad, thousands of Americans lose their jobs. Yet, keeping the factories in America results in high-paying union workers, and an overall increase in expenses, and a decrease in revenue, potentially putting the entire company at risk.
One solution to this situation would be to entice companies to stay in American through an increase in import tax or incentives offered at the federal and state level or to somehow reteach the American public how to pay reasonable prices for goods.
The success of President Trump
Former President Trump successfully brought many companies home, and pressure China to more favorable deals for the American people. Although “Big Tech” did not favor President Donald Trump for financial reasons. For instance, to make an iPhone in China costs Apple approximately $200.
Then there is the import cost, and the massive marketing cost, which brings the cost to approximately $400 to then be sold for $650 in American, which is approximately $250 in profit (Luckerson, 2014). However, to make an iPhone in America it is estimated that the cost would likely double. As a result, the cost would be passed over to the consumer.
That is, Americans would have to pay at least $1300 for their devices rather than $650. Are Americans ready to pay premium prices for goods they are accustomed to buying for very low prices? Likely not.
Manufacturing iPhones in America may be good for the economy but at the same time may put this publically traded company at risk. Therefore, the solution to keeping and bringing manufacturing jobs back to America becomes blurred.
The preferable solution to this problem would be to try to decrease operational costs in America for manufacturing companies. Something that may be achieved through extremely low business taxes on both the federal and state level, at least for a predetermined period of time to allow returning companies to reassess their financial situations, as influenced by the relocation back to America.
A recessionary gap is defined as the gap between the level of real Gross Domestic Product or GDP and potential output when real GDP is less than potential output (Rittenberg, 2009). This means that aggregate demand, GDP, and price level decline, while unemployment rises.
Aggregate demand is the relationship between the price level and the real quantity of domestically produced final goods and services. Aggregate demand consists of spending on real GDP. This is done through consumer spending, investment spending, government spending, and net exports (OSWEGO, Macroeconomics).
An increase in any of these areas of aggregate demand will raise GDP, raise price levels and lower the unemployment rate. This will push the economy into an expansionary period in the business cycle. Governments sometimes use stabilization policies to move economies to their potential output.
In a recession, they can use expansionary fiscal policies to influence economic activity through government purchases, transfer payments, and tax levels (Rittenberg, 2009). Deficit spending is when a government’s expenditures exceed its revenues.
The government’s excess spending should be financed through borrowing. More than likely, this borrowing is from foreign governments. The increased government spending can jump-start an economy that is in a recessionary gap by pumping money in, but it can also have adverse effects by raising interest rates and crowding out the private sector that might have borrowed for capital investments.
During a recession, normal unassisted adjustment can be slow and high rates of unemployment can last too long. Deficit spending can assist in bringing the economy back to equilibrium in a shorter period, lessening the effects of the recession.
John Maynard Keynes was a huge advocate for deficit spending as a fiscal policy tool to help moderate or end a recessionary period. During a recession, government spending can stimulate business activity, create jobs and bolster consumer spending.
Keynesian economics the use of countercyclical fiscal policies to keep the economy balanced. What this means that if the economy is expanding, the government should institute progressive taxation to keep consumer spending in check, or if in a recession the government should spend more money on infrastructure to bolster the economy (Danby). This countercyclical policy includes capital expenditures. Capital expenditures are expenditures that create future benefits.
For example, the government borrows money to build a new highway. While building the highway, they increase consumer spending, government spending and create jobs. Once the highway is built, the government can then create additional taxes for the use of the highway to help recoup their expenses or at least pay the interest on the borrowed money (Danby).
However, there are disadvantages to deficit spending. Spending money that you do not have can effectively increase the cost of everything that you buy. Transferring one debt to another to maintain deficit spending can have a compounding effect where interest accumulates on previous interest essentially driving up the prices of goods and services.
This creates a budgetary burden of higher interest payments (Danby). Additionally, countercyclical policies can have the opposite effect of what was intended. Fiscal policies can sometimes take months or even years to fully take effect.
The economy could have met natural equilibrium, thus pushing an economy that has entered into an expansionary period into a recessionary one. Deficit spending can also cause a crowding-out effect. Crowding out is when government spending replaces or drives down private sector spending.
Crowding out occurs when the government finances projects through deficit spending with borrowed money. When the government borrows such large amounts of money, this raises interest rates. Having higher interest rates dissuades individuals and businesses from borrowing, consequently decreasing their spending and investment activities (Danby).
Deficit spending can be helpful to encourage short-term growth in the economy. However, deficit spending really only puts a band-aid on the problem. While government spending increases and creates short-term unemployment relief, in the long term it raises taxes and interest rates which lead to lower consumer and investment spending.
When consumer and investment spending decrease, unemployment begins to rise and the economy shifts back to a recessionary period. Though the recessionary period may be longer if a nonintervention policy is assumed the economy will become balanced again, which brings us to deficit spending, such as the 6 Trillion deficit President Biden is facing.
During desperate times, oftentimes the steps to correct the problem may not seem feasible. When the national economy is faced with a recession, such as the Great Recession during President George W. Bush’s administration, two steps may be taken.
The government may cut spending in areas deemed appropriate potentially worsening the situation, and lowering the standard of living, or introduce a stimulus package from funds derived from an increase in borrowing that creates a potential deficit.
However, it may be necessary to borrow, even if creating a deficit, to create a multiplier effect and restart the economy while maintaining the same standard of living and as well as economic popular confidence.
There are advantages and disadvantages to deficit spending, depending on the economy. Deficit spending offers the populace a morale boost during uncertain and difficult economic times.
Putting more money in the economy through social service programs such as unemployment benefits helps Americans look for work, spend on basic necessities which trigger an economic boost since local businesses, other retail stores stay afloat, and may even employ new workers.
Increase spending stimulates the economy, helps small businesses, and puts more money in the pockets of average Americans. Deficit spending allows big economies to focus on the future by putting money into the economy with the purpose of promoting economic growth and avoid a Gross Domestic Product (GDP) decrease or projected decrease, significantly hurting the economy more so than deficit spending.
For instance, “When the economy goes into recession, deficit spending through tax cuts or the purchase of goods and services by the government can stop the downward spiral and help to turn the economy back around. Thus, deficits can help us to stabilize the economy” (Thoma, 2011).
Therefore, when deciding to increase spending even through a deficit, or decrease spending to avoid an increase in national debt, it is important to consider the particular situation and whether it merits arguable actions such as deficit spending.
An economy as big as the United States can have the luxury of deficit spending considering how it has bounced back from the most dreadful of crises such as the Great Depression.
Disadvantages and Crowding-out effect
Deficit spending may help offer relief during desperate times but not without its weaknesses. Deficit spending used to increase social services in times of need may create a sense of dependency on the population, and if funds are not employed correctly that end result may be worst than the actual recession. Considering there will be an influx of funds from borrowing, inflation is to be expected. “Another worry about deficits is that they will be monetized leading to inflation (Thoma, 2011)“.
As a result, there may be significant monetary devaluation potentially harming the economy. In addition to inflation deficit expending increases interest rates for the general marketplace. The more money the government borrows results in the increased interest rates for the private sector resulting in an economic setback.
The influx of funds may help boost the economy, but also inflation will generally increase the “…prices of goods and services in an economy over a given period (Touryalai, 2013)”. Inflation and high interest rates significantly impact economic growth. High interest rates may be the most significant downturn of deficit spending. Deficit spending that results in high-interest rates may result in a Crowding-out effect.
When deficit spending results in massive government borrowing, this, in turn, will significantly increase interest rates, and government spending crowding out the private sector, significantly reducing private sector spending and investment. This can significantly impact economic growth in the short term.
Deficit spending may not be the best way to improve the economic downturn. However, for a massive economy such as the United States, deficit spending has proven to be one of the best ways to improve the economic situation while maintaining popular morale about the situation. That is, although the Great Recession proved drastic for most Americans, at least Americans maintained the order they expect.
Social services were in place, foodbanks helped, hospitals, and schools were relatively unaffected by the crisis, in summary, publically funded services were conducting “business as usual”.
Deficit spending assures Americans that the government has things under control, otherwise, tax cuts and reduction of public services and institutions may trigger a countrywide economic downturn, evident during the Great Depression in the early 1900s.
Economic Variables of Paradox of Thrift
The paradox of thrift argues that minor household decisions may have a significant effect on the overall economic health of a country. “The paradox of thrift refers to how—in the Keynesian model of the economy—and increase in saving reduces production and employment (Thies, 2001)”.
The theory argues that during recessions, individual Americans may worsen the situation when they do not spend. Based on that theory, when people save rather than spend, businesses do not earn, output decreases, businesses lay off employees, and those employees are then unable to save and spend.
I strongly agree that consumer spending significantly affects the overall health of the economy. When consumers refrain from spending businesses suffer. During high demand, normally during holiday seasons, large corporations increase personnel to keep up with demand. While suppliers of goods and services increase production.
Hence, holiday seasons benefit the economy by increasing supply and demand. “The National Retail Federation revised its holiday sales forecast upwards from 2.8 percent (which it had forecast in October) to 3.8 percent, for a record $469.1 billion (TEJADA, TJ, & REGAN, 2011)”.
When consumers are willing to spend, rather than save, they may be able to put money in the economy which supports small and large businesses, which are normally taxed by the government.
As a result, creating a stream of revenue of taxes and, business sales, and wages. During the Great Recession of 2008, mainstream media reported that “A solid Christmas buying season will set a very positive tone for the economy going into 2012 (TEJADA, TJ, & REGAN, 2011)“.
Ultimately, the idea is that spending money creates a positive domino effect, which is the argument used by most Democratic presidents when they introduce increased spending and stimulus packages, is wrong in many cases.
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