The economic problems that are plaguing the United States economy at the present are numerous to say the least. Since the collapse of the Housing market, the United States has experienced what some have come to call an economic recession. While it remains to be seen if the United States economy is really undergoing a recession at this point in time, this situation can be used as a great opportunity to point out the current struggles of the American economy.
The fundamental flaws and structural weaknesses of the American economy are not only more visible now but also more potentially damaging. The current weakness that the American currency is experiencing coupled with the exponential increase in oil prices may have arguably not placed the country into recession but have brought its economy pretty close to it. As such, this brief discourse will try to examine what brought about this economic collapse precipitated by US government as it played an active role and is partly responsible for the current economic crisis.
This will be done by showing that the problems were brought about by the failure of the US government to address the key problems; namely, Pension Underfunding, Public Debt, Overbuilding in Calamity prone areas, Retirement and Social Security and Energy. This will be done in the light of the effort of the Federal Reserve to address the this issue and will be accompanied by an assessment of the effects of these policies on the current financial situation. Problems and Solutions: The first problem, Pension Underfunding is a very large problem for the American Economy.
According to certain independent studies, the underfunding that large companies have done for the pension plans will result in a very large public deficit in the future especially if the Pension Benefit Guaranty needs to bail out these companies. The problem here is that the present workers and future pensioners are working without any future security. There is no guarantee that upon retirement they will be able to receive anything. This could spur an attitude of non-spending and result in an economic slowdown.
Another effect that this problem could have is on the healthcare system. Without the financial security that the pension provides, the American healthcare system could bear the burden of millions of pensioners all seeking aid. The healthcare cost in the United States is becoming excessive and people are unable to afford or obtain any type of healthcare. It cannot be denied that there is something wrong with the system today. The rate of the uninsured and underinsured is rising every year. Not having health coverage leads to 18,000 deaths a year (Davis 23).
A Universal Health Care system is to ensure that all residents, regardless of their position in life, maintain coverage in the event of injury or the need to pursue a general practitioner. This type of system would increase taxpayer dollars, burden the government when funding is not available, cut funds from certain programs, and increase the number of patients to each nurse. Thus, by having a weak pension fund the healthcare system of the United States could be affected thus increasing the financial burden upon the American government.
The Second problem is the ever growing public debt. The recent economic slowdown as caused by the collapse of the Housing market has shown that there is no solid economic backing for many financial institutions. In an economy where the public debt has amounted to over seven trillion dollars (US$ 7 trillion), it becomes clear that this problem is something that the future generations will have to deal with. The problem with having a huge amount of public debt is that it could affect the debt servicing of the country.
At present, the United States spends nearly 10% of its Gross Domestic Product on debt servicing, with the increasing public debt and the maturity of these loans, the United States could have to increase the amount that it spends on paying back these loans. The end result of this is that there could be a slowdown in the development of public services and also in the construction of public works. In order to meet these payments, the United States government could be forced to increase taxes and cut back on public spending. The net effect of this policy will be to make the economic struggle even worse.
Without the necessary government spending, the public would be wary about spending and would instead focus more on saving in order to anticipate future economic reverses. This would result in a general economic stagnation. Analogous to the collapse of the Housing sector is the collapse of the very houses that are erected. It may be unfortunate to state that the woes of the Housing sector have only just begun but that is the case at the present. The overbuilding that has happened in coastal areas and earthquake territories can result in massive property damages.
As the aftermath of Hurricane Katrina has shown, a single powerful hurricane could instantly wipe out billions of dollars worth of infrastructure. The reason that this is a problem can be explained through this simple GDP explanation. The basic GDP equation includes the amount that the government spends on infrastructure and the rechanneling of funds into the private sector. In this model, the investment that a government makes in preschool programs creates more jobs and better opportunities for young students.
This directly affects the productivity curve of the populace therefore making it into an economic activity. On the other hand, the new military weapon system is also another way of increasing the GDP because it creates more jobs and increases government spending in that economic sector. The spending on healthcare and the controls that are placed on the internet can also be considered as economic issues because they directly and indirectly affect the amount of money that people will spend on these activities. Stringent government regulations on the internet could stifle its economic growth.
Alternatively, by subsidizing the cost of healthcare, the government could make it more available and increase human capital investment. Since the GDP of the government will be used to deal with the potential property damage should a single calamity occur in any one of these areas, the rest of the economy will suffer because the funds that are needed will be diverted to relief efforts. The government is currently offering a number of subsidies to these companies and is therefore encouraging people to allow the government to bear the burden.
This is a serious economic flaw that must be addressed. One of the problems, which are related to the first item, is the low savings rate which results in the reduction of social security. The lower savings rate means that there could be a shortfall of nearly four trillion dollars (US$ 4 trillion) by the year 2017. People are not inclined to place their savings in what they consider low return policies and instead have shifted to greater consumer spending. While in theory this could be good for the economy, in the long run, this could result in more trouble.
With people less inclined to invest their funds or to save their earnings, there is a decrease in the amount of capital funds that are available in the market. This in turn results in a slowdown of new comers into the market due to the scarcity of capital funds. Greed as a regulator in a capitalist market functions in a similar way. In what is termed as the “balancing mechanism” of greed, the capital that is infused into any industry or business will always look for the cheapest source. Given this behavior, it is logical to assume that this capital will go to places where labor and materials are cheap.
This low cost will not remain forever and will eventually force the prices of the factors of production up and by doing so removing the advantage that was sought after in the first place. This in effect levels the playing field and regulates the market. The recent decrease in savings, however, will not create this scenario and will instead force the capital elsewhere and adversely impact the American economy. Finally, the most serious problem is the large dependence that the United States has on oil.
The recent economic situation of the United States could arguably be better were it not for the exponential increase of oil prices. As the world’s largest importer of oil, the United States spends a large amount of its funds on energy and energy alternatives. It can even be argued that the total cost of most goods produced is attributed to oil costs. The problem here therefore is the reliance that the United States economy has upon oil imports. Any slight increase can drastically affect the American economy as we can see at present.