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American Economy | Ali Malik

The fundamental problem of the US economy remains intact. The problem stems from structural issues with the work force. Just when the US economy is growing again, this growth is leaving quite a few behind

The Federal Reserve of the US (Fed) raised its base rate for the first time in 10 years. More importantly, after the 2008 financial crisis, the base rate that moved to zero has moved above zero for the first time. This is a signal that the era of easy money is ending. The base rate is the rate at which the Fed lends. Post the 2008 financial crisis,the Fed lowered the base rate to zero to make easy money available to the financial sector to ensure that the credit markets do not freeze. The idea was that if the Fed had zero interestrate, easy money would be available to the financial sector and this would translate into increased lending, contributing to enhanced economic activity that would enable the US economy to come out of its worst crisis since the great depression of 1929.

Just when the Fed’s stimulus has ensured that the US economy does not stay stagnant and the economy, of late, is showing signs of growth and recovery, the fundamental structural drags remain. For one, the fiscal gridlock in Congress over budgets in the last many years has shaken confidence in the US economy. Secondly, for all its success in ensuring that the economy revives, the zero interest rate policy has a very low conversion rate when it comes to translating into lending to consumers/small business and thus the impact on economic growth is not as the zero rate’s impact should have been. So the question is: where did the cash go?Well, for one, one needs to look at the balance sheets of large US corporations, mostly parked outside the US, through generated profit. Also, a lot of it got borrowed in the US and got invested in more lucrative developing markets.

On the fiscal side, Congress may be waking up from slumber and trying to reach a broader long-term consensus on fiscal policy. The agreement to end congressional gridlock on the budget last week is one indication of this. Congress realises that the gridlock over budget was painting it as a lame duck, polarity plagued institute. But the fundamental problem of the US economy remains intact. The problem stems from structural issues with the work force. Just when theUS economy is growing again, this growth is leaving quite a few behind. The current unemployment rate is reaching five percent. This is lower than eight percent at the start of the financial crisis and around 10 percent at its peak. This should be good news for President Obama, the Democratic Party and the US. It turns out that it is not.For during the same period, the job participation rate has dropped by around five percent to 62 percent. The most plausible explanationfor this decline can be that people stopped looking for jobs as no jobs were there and so, just when among those who seek jobs only 5 percent are unemployed compared to 8 percent earlier, there are 5 percent less people looking for jobs.

Also, among those who are working, the median income has been stagnant despite the growing economy and income inequality is growing. This means that though the economy has started to grow, a large swath of the population remains worse off than they were at the beginning of the financial crisis. And if one has this picture in view, one should not be surprised at why angry men like Donald Trump are attracting so much public support for their campaign. They are masterfully channeling this situation to portray Obama as a failure and more so the entire system, including Congress, as ineffective. Thus the “agents of change” in the US are more real.

This anger, unfortunately, is not the solution to the US’ deep-rooted structural crisis. The fundamental crisis of the US economy is that the segments in which it stays most competitive, like hi-tech, biotech etc.do not have an ample and trained workforce. Just when the US economy transformed from an industrial economy to an information economy, its native workforce did not evolve accordingly. A realistic solution for the US will be to broaden its social security net in the short to medium term and successfully link it to a high rate of conversion from the industrial to knowledge workforce. This will require expanding on the induction of high-skilled workforce from abroad to ensure that competitive sectors of the economy keep growing at a higher pace.

But all these require deep-rooted structural reforms that in turn require statesmanship and determination. The easier way out can be crying full throttle over the rhetoric of war, xenophobia, insults and jingoism. The US’ route out of the financial crisis has not been the most efficient and now, when it is out of it, it is to be seen if it chooses the route of reform or riling.

The author can be reached on twitter at @aalimalik

Source: http://www.dailytimes.com.pk/opinion/24-Dec-2015/american-economy

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