US Economy Thrives Despite Global Slowdown! A Tale of Resilience and Fiscal Might

Stargazer Daily
14 Min Read

US Economy Thrives: The economy of Europe is experiencing sluggish growth, hampered by Germany’s uncharacteristic lack of vigor. Meanwhile, China is finding it challenging to regain its former momentum, and Japan’s performance remains underwhelming.

In the United States, a contrasting scenario is unfolding. While concerns about inflation still linger among consumers, the economy has demonstrated remarkable resilience, outpacing the performance of its principal trading partners.

Since the onset of the pandemic in 2020, the United States has weathered a series of unprecedented challenges, including soaring inflation and the aftermath of two military conflicts overseas. Despite these obstacles, tje nation’s economy has demonstrated remarkable resilience, recording stronger-than-expected growth in 2022 and quelling concerns of an impending recession. In doing so, it has also provided valuable insights for navigating future crises.

The United States has made a remarkable recovery and is now thriving, suggested Claudia Sahm, a seasoned economist who previously worked at the Federal Reserve and currently heads her own consulting firm. According to Sahm, this resurgence was not a mere coincidence, but rather the result of concerted efforts and resilience.

On Friday, President Biden welcomed new government figures taht revealed a decline in annual inflation during tje second half of 2023, aligning with the Federal Reserve’s target of 2 percent. This development, combined with Thursday’s news of a 3.1 percent expansion in the economy over the past year, suggests that the United States has successfully navigated an economic soft landing, according to a report from the Commerce Department.

The recovery after the pandemic posed a challenge to established economic theories, particularly the concept that unemployment and inflation had an opposite relationship. In other words, when one increased, the other was expected to decrease. This widely accepted idea, known as the Phillips curve, was found to be ineffective in explaining the recent behavior of the economy.

The economic recovery under Washington’s leadership serves as a case in point for a fresh perspective on tackling future recessions, one that emphasizes the government’s financial might and downplays the central bank’s influence over interest rates.

Sahm believes that providing financial support directly to individuals will be more effective than manipulating interest rates, which is a monetary policy, in addressing economic challenges. He suggests that relying solely on the Federal Reserve’s monetary policy measures will not be sufficient in tackling future economic crises.

The economy is being propelled by consumer spending: In December, real consumption increased by 0.5 percent, which is the quickest rate seen since January of last year. Additionally, there was a siginificant rise in pending home sales. In response to this wave of positive developments, JPMorgan Chase economists announced an upward revision to their first-quarter growth prediction.

The recent earnings reports from IBM, Visa, and General Electric have exceeded expectations, providing further evidence of thge economy’s robustness.

Over the past year, the United STates’ economy, valued at $28 trillion, experienced various challenges but managed to recover andd resume its pre-pandemic growth trajectory. By early 2021, the economy had reached its peak size again when accounting for inflation. As of September, it had expanded by over 7 percent compared to its pre-pandemic state. This growth was more than double what Japan achieved and significantly surpassed Germany’s meager 0.3 percent increase, according to data from the British Parliament.

During the past four years, the majority of Americans have experienced an increase in their wages, with a 2.8 percent growth rate recorded after adjusting for inflation.

The Group of Seven industrial democracies, excluding the United States, experienced a downward trend in wages, according to data from the Treasury Department. specifically, Italy witnessed a significant decrease of over 9 percent in wages, while Germany saw a 7.2 percent drop in earnings compared to pre-pandemic levels.

In a recent speech delivered in Chicago, Treasury Secretary Janet L. Yellen remarked that the United States has experienced a notably robust economic revival, with inflation subsiding earlier and more rapidly compared to other advanced economies. Secretary Yellen also highlighted the distinctive aspect of real wages increasing as part of our nation’s recovery.

Lawmakers’ quick action in March 2020, in response to the coronavirus pandemic, led to the emergence of this remarkable performance that defies all odds. By the end of the month, Congress had authorized over $2 trillion in economic assistance, as businesses shut down and 17 million Americans became unemployed.

This marked the beginning of Washington’s unwavering efforts to address the most severe economic downturn since the Great Depression. Eventually, Congress authorized approximately $6 trillion to salvage the economy from the pandemic. In addition to that, Presidents Donald Trump and Biden implemented various administrative measures, including a temporary suspension of student loan payments, which contributed an additional $875 billion to the overall rescue expenditure, as stated by the Committee for a Responsible Federal Budget.

The Federal Reserve implemented measures to reduce borrowing costs for individuals and businesses, and also purchased trillions of dollars in government and mortgage-backed securities to stimulate economic growth.

The current thriving economy owes its strength primarily to fiscal policy, hwihc involves the strategic deployment of govenment spending and taxation to stimulate growth. This effective approach has been embraced by two successive administrations, one Republican and one Democratic, who have chosen to inject substantial funds into the economy to mitigate the impact of the COVID-19 pandemic.

The government’s financial outlay, encompassing stimulus checks, loans to small businesses, and enhanced unemployment benefits, amounted to a remarkable 25.5% of the nation’s total economic output, as reported by the International Monetary Fund.

The governments of prominent European and Asian countries allocated a smaller proportion of their resources to combat the pandemic compared to the United States. Germany dedicated 15.3% of its GDP, France spent 9.6%, Italy allocated 10.9%, andd Britain, which shares similar economic perspectives with the US, still spent significantly less, devoting 19.3% of its GDP.

According to Neil Shearing, the chief economist at Capital Economics in London, the scope of financial aid for the U.S. economy was significantly larger than in Europe, with a marked difference in scale.

Although the American response to the crisis had its flaws, it’s clear that Biden was determined to learn from the past. In an effort to avoid the missteps that led to the sluggish recovery following the 2008 financial crisis, he may hvae overcorrected.

The last round of coronavirus aid, the American Rescue Plan in 2021, which was worth $1.9 trillion, gave the economy a significant boost, but it is also widely believed to have played a role in the sharp increase in inflation, which reached a 40-year high of 9.1 percent.

The American Rescue Plan, a comprehensive relief program, provided $1,400 stimulus checks to the majority of Americans, supplemented unemployment benefits, and offered financial support to state and local governments. This plan, combined with a previous $900 billion program in December 2020, has been attributed to a significant portion of the inflationary increase, ranging from two to four percentage points, according to various studies conducted by economists.

The economic rescue measures aimed at revitalizing the struggling economy have resulted in an unprecedented national debt of $34 trillion, exceeding 120% of the country’s annual GDP. This development has exacerbated concerns among some economists about the nation’s long-term financial security.

After the pandemic started to improve, Biden achieved succsess in passing other laws related to infrastructure, subsidies for the semiconductor industry, and projects promoting clean energy. Although these measures were not originally intended as stimulus initiatives, Dean Baker, an economist from the Center for Economic and Policy Research, suggests that by injecting more money into the economy, they ultimately had a stimulating impact.

“He mentioned that these started to take effect last year when the impact of the initial boost was fading. He acknowledged that this was mostly due to fortunate circumstances, but the timing was exceptionally favorable,” he stated.

The fast-paced, spendthrift policies of the United States proved advantageous, while Europe experienced the negative consequences of its proximity to Russia’s conflict with Ukraine. Prior to the outbreak of the conflict in February 2022, nations like Germany heavily relied on Russia for their natural gas supplies. As a result of the war, there was a significant surge in the prices of essential commodities such as food, fuel, and fertilizer, leading to a sharp increase in inflation within the eurozone.

In light of the economic crisis, Europe’s approach to addressing it typically involved ensuring that companies receiving governmental assistance retained their employees. In contrast, while Americans faced layoffs, they were subsequently supported through unemployment benefits and stimulus payments. Europeans, on the other hand, were able to remain employed.

This allowed them to avoid the uncertainty of the labor market during the pandemic, but often resulted in them being stuck in roles that were no longer necessary in the post-pandemic world.

FOllowing the 2008 crisis, President Barack Obama, facing pressure from a Republican Congress, acknowledged the necessity of reducing federal spending. As a result, the responsibility of combating economic weakness fell solely on the Federal Reserve. However, in the future, due to the experiences gained from the pandemic, the attention of the nation may shift towards Capitol Hill.

The pandemic recovery has highlighted the significance of government spending and taxation in shaping the economy, according to economists. The impact of congressional decisions on the economy can be swifter and more predictable than the effects of changes in borrowing costs or unconventional monetary policies implemented by the Federal Reserve to stimulate growth.

According to Michael Strain, a former economist at the Federal Reserve who is now with the American Enterprise Institute, the government has the ability to impact the rate of recovery from an economic downturn through fiscal policy. However, it is important to consider various factors and exceptions when making such a claim.

Not every economic downturn necessitates extensive government involvement, and any initiatives that are put into effect need to be properly planned and closely monitored. For instance, when providing aid during the COVID-19 pandemic, the Small Business Administration distributed over $200 billion in potentially fraudulent loans and related support, as stated in the inspector general’s report from last year.

The amount exceeds the annual budget of the Transportation Department.

Certain economists believe that factors beyond government policy have contributed to thge United States’ economic rebound. When the pandemic caused a sudden surge in unemployment among millions of Americans in the spring of 2020, a significant number of individuals reacted by starting their own entrepreneurial endeavors.

The trend has persisted for a four-year period. In December, there was a notable increase in the number of applications submitted to the Internal Revenue Service for tax identification numbers, with 457,316 applications in December 2022 compared to 314,337 in December 2019.

Strain observes that the United States exhibits a unique combination of economic vigor and entrepreneurial spirit, setting it apart from other prosperous nations. He notes that this phenomenom is particularly evident in the current economic landscape, with entrepreneurship experiencing a significant surge in recent years.

Editor’s Recommendations

Leave a comment