The United States Economy

Past and Present

I. The U.S. Economy: Introduction

The US has the largest and most technologically powerful economy in the world, with a per capita GDP of $48,100. In this market-oriented economy, private individuals and business firms make most of the decisions, and the federal and state governments buy needed goods and services predominantly in the private marketplace. US business firms enjoy greater flexibility than their counterparts in Western Europe and Japan in decisions to expand capital plant, to lay off surplus workers, and to develop new products. At the same time, they face higher barriers to enter their rivals' home markets than foreign firms face entering US markets. US firms are at or near the forefront in technological advances, especially in computers and in medical, aerospace, and military equipment; their advantage has narrowed since the end of World War II. The onrush of technology largely explains the gradual development of a "two-tier labor market" in which those at the bottom lack the education and the professional/technical skills of those at the top and, more and more, fail to get comparable pay raises, health insurance coverage, and other benefits.

The U.S. Economy: Introduction

Since 1975, practically all the gains in household income have gone to the top 20% of households. Since 1996, dividends and capital gains have grown faster than wages or any other category of after-tax income. Imported oil accounts for nearly 55% of US consumption. Oil prices doubled between 2001 and 2006, the year home prices peaked; higher gasoline prices ate into consumers' budgets and many individuals fell behind in their mortgage payments. Oil prices increased another 50% between 2006 and 2008. In 2008, soaring oil prices threatened inflation and caused a deterioration in the US merchandise trade deficit, which peaked at $840 billion. In 2009, with the global recession deepening, oil prices dropped 40% and the US trade deficit shrank, as US domestic demand declined, but in 2011 the trade deficit ramped back up to $803 billion, as oil prices climbed once more.

The US Economy: Introduction

The global economic downturn, the sub-prime mortgage crisis, investment bank failures, falling home prices, and tight credit pushed the United States into a recession by mid-2008. GDP contracted until the third quarter of 2009, making this the deepest and longest downturn since the Great Depression. To help stabilize financial markets, in October 2008 the US Congress established a $700 billion Troubled Asset Relief Program (TARP). The government used some of these funds to purchase equity in US banks and industrial corporations, much of which had been returned to the government by early 2011. In January 2009 the US Congress passed and President Barack OBAMA signed a bill providing an additional $787 billion fiscal stimulus to be used over 10 years - two-thirds on additional spending and one-third on tax cuts to create jobs and to help the economy recover. In 2010 and 2011, the federal budget deficit reached nearly 9% of GDP; total government revenues from taxes and other sources are lower, as a percentage of GDP, than that of most other developed countries.

The U.S. Economy: Introduction

The wars in Iraq and Afghanistan required major shifts in national resources from civilian to military purposes and contributed to the growth of the US budget deficit and public debt - through 2011, the direct costs of the wars totaled nearly $900 billion, according to US government figures. In March 2010, President OBAMA signed into law the Patient Protection and Affordable Care Act, a health insurance reform bill that will extend coverage to an additional 32 million American citizens by 2016, through private health insurance for the general population and Medicaid for the impoverished. Total spending on health care - public plus private - rose from 9.0% of GDP in 1980 to 17.9% in 2010. In July 2010, the president signed the DODD-FRANK Wall Street Reform and Consumer Protection Act, a law designed to promote financial stability by protecting consumers from financial abuses, ending taxpayer bailouts of financial firms, dealing with troubled banks that are "too big to fail," and improving accountability and transparency in the financial system - in particular, by requiring certain financial derivatives to be traded in markets that are subject to government regulation and oversight. Long-term problems include inadequate investment in deteriorating infrastructure, rapidly rising medical and pension costs of an aging population, sizable current account and budget deficits - including significant budget shortages for state governments - energy shortages, and stagnation of wages for lower-income families.

The U.S. Economy: Facts

Population: 313,847,465 (July 2012 est.). country comparison to the world: 3 GDP: $15.09 trillion (2011 est.). country comparison to the world: 2 GDP per capita: $49,000 (2011 est.) country comparison to the world: 11 Labor force: 153.6 million Unemployment rate: 9% (2011 est.) Population below poverty line: 15.1% (2010 est.) Distribution of family income - Gini index: 45 (2007) Public debt: 67.7% of GDP (2011 est.) Inflation rate (consumer prices): 3.1% (2011 est.)

II. Rugged Individualism, Melting Pot and changing Structure of US Economy

I. Factors with Lasting Impact on the US Economy and Society Rugged Individualism: (i) philosophy of individualism basis of American dream (ii) belief that individual wealth reward for hard work and frugality (iii)American oppose schemes to redistribute wealth and income. Government should take responsibility for those who cannot take care of themselves(USA 25%, Germany 50%, Britain 62%, Spain 72%) (iv) philosophy of individualism also explains Am preoccupation with higher education (among those in their 20s US (66%),Jpan (39%), Europe (30%) 2. The philosophy of melting pot: Positives (US benefits from diversity of skills and talents) Negatives (discrimination: economic inefficiency 3. Changing structure of US economy
Sector Agriculture Industry Services 1870 1900 1920 1940 1995 47 35 24 19 3 27 34 41 35 20 26 31 35 46 77 2011 1 90 80

III. The U.S. Service Sector

1. Phases of service sector: (i) end of civil war (1865) to the Great Depression (1929), mainly wholesale and retail trade (ii) Expansion of public sector services during the GD (iii) Since WWII increased prosperity, education, recreation and health 2. Causes of rapid growth of service sector: (i) Income elasticity of demand hypothesis (Americans richer) (ii) deindustrialization hypothesis (Americans less competitive) (iii) cost disease hypothesis (service sector productivity slower, employment must increase rapidly to compensate for lower growth of productivity. Also prices up, so as a proportion of GDP up (iv) Economies of scale hypothesis: Growth of SS arose from efforts to improve organizational efficiency. Many business such as accounting, computer programming, mailing and printing may be performed more efficiently if moved from small offices in industrial firms into specialized firms in the service sector. (v) Labor supply hypothesis: changing structure of LF (women 1950=28%today 47%. Many women found jobs in SS. Therefore SS increased.

The U.S. Service Sector

3. Significance of Shift to Service Sector: (i)Changed Nature of Work and Employment (more Americans engaged in sales than manufacturing, college students 1950-60 specialized in engineering, now in business, computers, education, recreation.(ii) SS employees more likely to be part time, self employed employees, less likely to join labor unions. (iii) SS increase contributed to inequality. Divided in low income jobs like barbers and janitors and high income financial and professional services.(iii) SS faces little foreign competition, so prices have increased in this than any other sector of the economy.(iv) SS immune to recession: many self employed (lawyers, realtors, barbers, child care workers. Decreased demand for services means decreased income but not loss of job, in manufacturing industries wages less flexible, cannot store inventories, no surpluses to be sold before production resumes. (v) SS automatic stabilizer as government services not reduced during recession. (vi) SS contributes positively to US BOP, 1993 merchandise deficit $133B, SS surplus$57B.

IV. The U.S. Industrial Sector

IV. The US Industrial Sector:
1.Before civil war : (i) US economy about text book model of perfect competition (large number of Buyers and sellers, no barriers, homogenous product, firm price taker, no single plant controlled as much as 10 percent of the output. (ii) 1870s average firm in oil and steel industry employed fewer than 100 people. (iii) Govt. played limited role. 2. Emergence of US Giants: (i) Spread transportation and communication network (Erie canal 1825 linked NYC with agricultural areas of western NY . Many other canals, by 1850, 1.6 B tons of cargo transported by river/canals (ii) 1828 first steam engine railways, by 1860, 30,000 miles of railway track (iv) 1837 Sam Morse invented telegraph, and telegraph lines of western union reached the pacific coast by 1861 (v) These rapid advances in transportation and communication formed a national market (vi) Factories would be built with the assurance that output could be sold throughout the US and overseas. (vi) By 1880 many US giants established (Standard Oil, Westinghouse, Edison, General Electric. (vii) 1879 standard oil trust (Rockefeller) controlled 90% of US oil refining (viii) Carnegie in 1900 produced half of US steel (viii)1889 NJ legislature legalized formation of holding companies and mergers (ix) 1880 US by-passed UK ,to become Worlds leading producer of industrial goods.

Concentration of Economic Power: Measurement, Levels, extent

3. Concentration of Economic Power/Measuring Level of Concentration :
Most familiar yard stick is four firm concentration ratio (FFCR). It is the percentage of output that is produced by the four largest firms of an industry. Higher more monopolistic, lower less monopolistic.
4. Levels of concentration/Strucuture of Industrial Firms Each industrial sector could be assigned in one out of 4 categories. (i) Pure monopoly: market share 100%, no rivals, strong entry barriers, price controls (ii) dominant firm: market share 50-90 %, no close rivals, entry barriers, price controls (iii) Oligopoly: FFCR above 60%, stable market share, medium to high barriers, rigid prices (iv) Effective competition: FFCR below 40%, unstable market share , no barriers, flexible pricing. (v) A recent estimate shows the following. Vehicle aircraft alum. steel sp.goods jewelry 90 72 74 44 13 12

Concentration of Economic Power: Backlash and Anti-Trust Laws

5. Social Costs of Industrial concentration: (i) public opinion against political and economic Power concentration (ii) Am. believe profits of large corporations excessive (iii) monopolies restrict output and raise prices (iv) All K expenditure and investment in manufacturing sector is controlled by 200 large firms. If a small number of corporate executives become pessimistic about business outlook, then: a decrease in investment, growth, recession and Unemployment.

6. Backlash against monopolies and anti-trust laws: (i) In 1887 interstate commerce commission (ISCC) established to regulate railroad rates (ii) 1890 Sherman anti trust act: to prohibit conspiracy in restraint of trade or any attempt to monopolize any part of trade and commerce (iii) 1914 Clayton Act: declared 4 specific practices illegal (1) merger of competing Cos. (2) Price discrimination (3) Tying contracts (requiring purchasers to buy from the sellers (4) interlocking Directorates (director of one company sitting in the board of directors of a competing company).

V. The U.S. Labor Markets

V. The US Labor Market: (i) Labor allowed to unionize and collectively bargain in USA since 1930s Wagner Act. Unionization at its peak in 1955 at 33% of LF (ii) Unions in USA organized along industry lines all union workers in auto industry members of united auto workers (UAW) (iii) Britain organized along occupational lines. All electricians belong to an electricians union irrespective of industry (iv) In Japan organized along company lines and represent white and blue collar workers. (v) The US labor markets competitive; no monopolies on employer side and or monopoly on labor side, yet there is unemployment (vi) Why? According to classical economic theory this is because of (i) downward inflexibility of wages stemming from (a) long term contracts/unions (b) minimum wage laws. Reasons for declining Unionization: (i) job satisfaction hyp (ii) employer resistance hyp (iii) Govt. substitution hyp (iv) growth of service sector/self employment (v) late labor legislation giving collective bargaining rights to labor (vi) perceived association of communism and socialism.

VI. The U.S. Financial Sector

VI. The Financial Sector Financial institutions (banks, securities firms, insurance) provide efficient methods for payments between buyers and sellers, savings, extend credit, allow individuals to share their risks with larger number of people. . Trends in US banking (i) before 1863. unregulated banking, 2000 banks could issue their own currency. (ii) Banking act 1863-64 established uniform and safe banking system. The federal reserve act of 1913 established 12 federal reserve districts each owned by member banks. Each district bank controlled by 7 member board of governors appointed by the president of the US for a period of 14 years. Chairman appointed for a period of 4 years. The Fed controls the Money supply by increasing/decreasing discount rates, increasing/decreasing the RRR and by selling/buying bonds/securities.