The United States Faces Short and Long-Term Fiscal Challenges

Economic Critique

The United States faces short and long-term fiscal challenges. This paper will define the current state of affairs on the United States economy in regards to the unemployment rate, expectations, consumer income, and interest rates. There will also be a critique on the existing effects on the economic factors on aggregate demand and supply, the fiscal policies being recommended by government leaders and the effectiveness of those policies from the Keynesian and Classical Model perspective.

Current State of Unemployment

The United States unemployment rate is an issue that has dogged the US economy since 2010. Although the unemployment rate has shown a steady decrease, the US unemployment rate remains at 7.7%, which leaves an estimated 12.3 million Americans without jobs (Trading Econmomics, 2012). Total nonfarm payroll increased by 230,000 in February 2013 (Bureau of Labor Statistics, 2013), however a proposed bill that includes an $85 billion spending cut will threaten more than 750,000 before the end of 2013. Not only will the bill threaten existing jobs, the spending cuts will decrease current unemployment benefits by over 10% (The Inquisitr, 2013).

Current State of Expectations

The United States needs to control spending and help businesses create jobs. A majority of the unemployment is a result of long-term structural changes in the workforce. Job cuts and layoffs had more to do with an increase of technology, globalization, and increased taxes. Small businesses are encouraged to develop entrepreneurial thinkers and devise successful businesses that will create opportunities.

Under current policy, the US economy is not expected to grow out of its present recession. There are far too many restrictions and taxations on business that stifle growth and do not offer opportunities to create jobs. The house, and the President cannot meet common ground on budget issues and tax cuts; the January 2013 "fiscal cliff" deal ended with households seeing 2% less of their paychecks. The March 2013 sequester will lead to decreases in federal worker wages and mass layoffs. The Baby Boomer population is nearing retirement and will begin to strain government benefits such as Social Security and Medicare (Burman, 2013).

Current State of Consumer Income

The current state of consumer income is grim in the United States. It was reported in January 2013, personal income dropped 3.6% in only a month. According to Beth Belton of USA Today, it was "the biggest one-month drop in 20 years" (Belton, 2013, para. 1). The reason consumer income dropped seemed to be because businesses were trying to pay out dividends and bonuses before income taxes increased at the beginning of the year (Belton, 2013). This also reflects on why consumer spending may not be rising as one would hope. The slow rise in consumer spending indicates a concern that the economy is still not as stable as America would like to think it is.

Current State of Interest Rates

Currently, interest rates in the United States are low because of a poor economy and an attempt to persuade consumers to spend more. However, these low interest rates are not enticing to many U.S. consumers due to higher gas prices and their choice to save money. The gas prices continue to increase, forcing consumers to put more money into their gas tanks than into the economy. Furthermore, it is important to note, that low interest rates may tempt irresponsible consumer spending because people want to buy when interest rates are low...even if they cannot afford to do so. Low interest rates are creating problems for Baby Boomers nearing retirement and those already there. Pre-Retirees do not have the time for the market to become a bull market again, the low interest rates for them means working longer or living on less. Lower interest rates can be useful for the short-term, but long-term there are severe concerns.

Effect on Aggregate Demand and Supply

Economic factors influence the economy is different ways. Unfortunately, the described current situation has a primarily negative effect on the U.S. economy. According to Colander (2010), "Okun's rule of thumb states that a 1 percentage point change in the unemployment rate will be associated with a 2 percent change in output in the opposite direction" (p. 170). This means that the aggregate supply is heavily influenced by employment rates. The current above natural-rate unemployment means that aggregate supply is low. Unemployment in turn also has an effect on demand. With decreasing unemployment, the