The United States economy has shrunk for the first time in three years, with Gross Domestic Product — the primary measure of a country’s economic growth — posting an unexpected drop of 0.1 percent in annual growth during the last quarter.
This probably surprised most economists.
Before the Bureau of Economic Analysis released this disappointing number last week, economists were predicting the BEA would report modest growth in the last three months of 2012.
For the most part, this reflects the unfortunate reality that the U.S. economy still remains deeply depressed from the financial crisis and ensuing “Great Recession” with perpetually high unemployment significantly
impeding growth.
Put more simply, the U.S. economy suffers from a lack of adequate demand. It doesn’t take a genius or any kind of complicated reasoning to figure this out.
Think of it this way: We have more than 12 million people in the U.S. who are unemployed — that is, actively seeking gainful employment but unable to find it.
Moreover, 8 million Americans work part-time because their hours have been reduced, or they were unable to find a full-time job.
Indeed, what our country suffers from most is high unemployment, which is driving our nation’s stagnant economic growth.
Imagine how much better off the U.S. economy would be if our country was operating at full employment.
The difference would be significant: millions more people would have jobs, meaning they would have substantially more income to spend on goods and services, thereby causing aggregate growth to soar.
More specifically, the Congressional Budget Office estimates that what we are actually producing falls short of what we could and should be producing by around 6 percent of GDP.
Why, then, are we offering no help to the unemployed, since their lack of consumer spending is obviously the direct cause of our current economic woes?
Because lawmakers in Congress, namely conservatives, have decided mass unemployment is not an impending concern, and the emphasis should be put on reducing budget deficits.
However, that is not the moral of the story. While it is necessary to understand that politics is always getting in the way of things, the point is the U.S. can return to once again having a robust economy.
And it can be accomplished by having either the Federal Reserve print more money or having the government spend more.
These are conclusions most people irrationally hate — aside from economists — but these methods for re-stimulating aggregate demand are of the utmost necessity, especially when an economy is performing below potential output.
With regard to the Federal Reserve, it has essentially exhausted its influence over the economy, as the Fed has taken extraordinary actions in response to the financial crisis to help stabilize the U.S. economy and financial markets.
As a result, the only logical conclusion for helping our dismal unemployment situation is through the government engaging in fiscal stimulus.
Undoubtedly, policy makers need to allow for significant decreases in tax rates — much like those suggested in Mitt Romney’s tax proposal — coupled with massive expansionary spending programs.
Spending programs such as a large-scale rebuilding of our nation’s bridges, roads and water systems would provide a boost to our economic recovery and stimulate job creation.
To be sure, these fiscal policies would further add to our nation’s short-term deficit problem. It is imperative that once our economy recovers and both unemployment and spending are back at their normal levels, we focus on balancing the budget.
At the present moment, though, we need to reemphasize talking about how we can put a dent in our unemployment rather than balancing the budget.
Our nation’s future well-being will greatly depend on how effectively we tackle our nation’s job crisis.
