Is economy in a better shape today than it was when the article was written? Refer to inflation, unemployment, the business cycle, GDP growth, the federal deficit, and the trade deficit.Answer this question after reading the article. From Fast Living to Slow Growthhe Americaneconomy, still rate only to 6.7 percent or so. The good can Economics Association in Newburdened by the excesses news is that inflation is likely to stay in Orleans a few days ago.of the 1980s, is struggling the 3.5 percent to 4 percent range evento regain its footing, a chal- if the economic recovery does pick upas once the growth disappears, debts be-"Like the debts of Latin America,lenge that it will confront through 1992 predicted.and perhaps much of the decade.With a burgeoning array of prob- year, however, is not going to be enough singular economic success in the pastlems masked by economic growth sta-tistics during the Reagan years, Americawas surprised when the problems cametogether at the start of the new decade incomplete recovery.to throw the country into recession andraise new questions about the nation'sfuture.Some analysts believe that the un-masking itself is responsible for thesour, uneasy mood of many householdsand businesses, and therefore also partlyresponsible for the fact that the economytoday is as "flat as a pancake," as onegovernment economist put it last week.That flatness is widely expected tocontinue only for a few more months,with growth resuming this spring asconsumers and businesses make moreprogress in digging themselves out fromunder a mountain of debt. The lowest large that its debt soared from less thaninterest rates in years and a bull marketin stocks have paved the way for almosteveryone to reduce the cost of theirdebts.But no one is looking for a boom.The nation still has a badly batteredfinancial system in which many lendersare unable or unwilling to make many by anunprecedented decline in nationalloans they would have made in the past. saving. Partly as a consequence, busi-State and local governments are cuttingspending and raising taxes, providinganother drag on the economy. Andcommercial real estate is so badly over-built in some parts of the country thatthere is an estimated 10-year supply ofempty space.By late this year, most forecastersexpect the civilian unemployment rateto drop from last month's 7.1 percentcome a major burden."On the other hand, there was aA simple resumption of growth thisto get the U.S. economy out of the decade: Arampant inflation was curbed,woods. The legacy of the 1980s is more albeit at the cost of a severe recession,than a matter of a recession and anand Federal Reserve actions to keep theflow of money into the economy atThe biggest problem in the eyes of moderate levels have kept the lid onmany economists is that the long ex-pansion, which led to creation of morethan 18 million jobs, came at the ex- of the 1980s failed to provide a magicpense of a sharp decline in savings and elixir for the economy, the decline inan enormous increase in the total debt inflation by itself has not done the trick,of governments, households and busi- either.since.But just as the sweeping tax changesnesses.Given the low level of savings andInstead of consumer spending rising investment, some economists now fearin line with incomes, purchases of newcars, medical care and other goods and during the 1990s to match the record ofservices far exceeded growth of after-tax incomes in the '80s. Instead of the services produced by each worker rosefederal government keeping its outlays a scant 0.8 percent a year.in line with revenue, it ran deficits sothat the United States will be luckythe '80s when the amount of goods andDornbusch and many other expertsregard that as a "poor economic perfor-mance" because the slow increase of$700 billion to nearly $2.3 trillion. Andbusinesses by the score racked up huge productivity and a growing concentra-debt increases in connection with take-overs, real estate developments and employees left the real wages of averageother expansions, particularly in ser-vices such as retailing.The rise in total debt was paralleledtion of income among more highly paidworkers lower than they were 10 or 15уears ago.Furthermore, with output perworker going up so slowly in the '80s,the major source of economic growthwas a rapid increase in the size of theness investment other than for replace-ment of worn out or obsolete plants work force as an ever greater share ofand equipment was cut nearly in half,relative to the size of the economy."The 1980s were a bit of a disasterfor the United States and the bill iscoming due," economist RudigarDombusch of the Massachusetts Insti-tute of Technology told a large audi- to expand much more slowly in comingence at the annual meeting of the Ameri-women sought jobs. U.S. gross domes-tic product rose an average of 2.2 per-cent a year only because of all thoseadded workers.Unfortunately, noted Dornbusch,the work force in the 1990s is projectedyears both because the population is to work as the share of the population recession in 1982 when the unem-in the labor force rose. Second, the ployment rate hit 10.8 percent.federal government failed to increasetotal taxes to cover large spending in-not increasing as rapidly and because itis unlikely that the participation ofwomen will keep rising strongly....Of course, with the recession andthe still incomplete recovery having left creases for programs such as defensethe civilian unemployment rate at 7.1 and Social Security. That gave a boost other employment. However, thepercent, compared to the 5.3 percentrate achieved for most of 1989 and part increasing the federal budget deficit. some analyss believe, took awayof 1990, there is a pool of jobless work-ers. But after the eventual recovery pro-vides work for that pool, economic borrowing spree.growth should slow again.."The economic problems that theUnited States faced today are not new,they have little to do with a minor[recession], they will not be solved by atax cut, and they will not go away afterthe election," said Barry Bosworth, asenior fellow at the Brookings Institu-tion..Since the jobless rate did not goup so much this time, most of thosewho lost their jobs quickly foundto individuals' after-tax incomes while experience with being out of work,And third, consumers, like the govern- the most solid prop under consumerment and many businesses, went on a confidence, a feeling of job security.Once jobs were called into ques-At the same session in New Orleans tion by the recession, what was left?at which Dornbusch spoke, Harvardeconomist Martin S. Feldstein, a former that they are worse off than 10 yearschairman of the Council of Economic ago," said Dernbusch. "They don'tAdvisers,argued that one byproduct of have a lot more income, they have athe ballooning federal deficits of the lot more debt, and they are far moreearly 1980s was a large rise in the value vulnerable. Before, they were will-of the dollar and a concomitant loss of ing to believe that everything wasAmerican competitiveness on world going to be al right as long as taxes"Consumers feel in their bonesThe centerpiece of Bosworth's argu- markets. The resulting rise in the U.S.ment was a chart showing that as in-come gains lagged,consumers kept right inflow of foreign capital that kept do-on spending. Over the decade, the share mestic investment from falling as muchof national output going for personalconsumption rose from about 63 per-cent-a level around which it had fluc-tuated for two decades-to an average gests that in most industrial nations anof 68 percent in recent years.Sharp Dropin Savings Meanwhile, prop up domestic investment only for afor three decades prior to the '80s, total limited time. If a country's level of has been overdone, Dornbuschnational savings had averaged morethan 8 percent of net product-a mea-sure of national income that takes outbusiness allowances for depreciation. ment "would mean a very slow growthIn the first half of the 1980s, the figure in future productivity and in the Ameri-dropped to 4.9 percent and then to 2.9percent from 1986 to 1990.Domestic investment did not fall assharply as did national saving becausea large inflow of money from foreign future will bring. One reason may be helps improve policies. Of course, ifinvestors, who bought American stocks,bonds, companies and real estate,supplemented U.S. savings as a source unemployment last year, even though fication in an election year or hous-of financing for investment.Consumers were able to increase percent. The number of claims filed for country is likely to hop from onetheir consumption despite the lack of unemployment benefits suggest that 23 crisis to the next, with little prosper-any rise in real average wages for sev- million persons lost their jobs last year, ity in between."eral reasons. First, more consumers went compared to 30 million in the previousdid not increase..."They also understand that mas-sive bank failures are not symptomsof prosperity but more nearly thecollapse of a house of cards, andtrade deficit was the counterpart of theas did national saving.But Feldstein said that research he above all, an indication that trust inand other economists have done sug- government's wisdomand prudenceis altogether misplaced," he contin-ued.inflow of foreign money is likely toHowever, the loss of confidencesavings falls and stays down, then its added, though that might not turnout to be a bad thing, depending onhow government responds."The couniry is not bankrupt,there will not he another 1930s andthe average Aimerican will not bepaying rent to a Japanese landlord,"unusual degree, the recession hascaused Dornbusch said. "But a deflation ofAmerican workers to question what the optimism is not inappropriate if itinvestment will eventually follow, hesaid. Eventually, continued low invest-can standard of living.An Insecure Look Ahead To anit is the backdrop for more 'dope'-that an unusually large share of themsuffered through one or more spells of middle-classtax cuts for instant grati-the unemployment rate never passed 7 ing-and-health gimmicks then theJohn M. Berry,. "From Fast Living to Slow Growth," The Washington Post, January 12, 1992.01992 The Washington Post. Reprinted with permission.

The American economy had its ups and downs.Since 1980's there was the cycle of business…

Is economy in a better shape today than it was when the article was written? Refer to inflation, unemployment, the business cycle, GDP growth, the federal deficit, and the trade deficit. Answer this question after reading the article.

Is economy in a better shape today than it was when the article was written? Refer to inflation, unemployment, the business cycle, GDP growth, the federal deficit, and the trade deficit. Answer this question after reading the article.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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