CopyofProject3FinalAnalysisofUSEconomy

Analysis of the United States Economy

Byron Poplawski

Dear Mr. Sanders,
As your economic advisors, we think it is important that you are aware of the current
state of the U.S economy. Our goal is that your initiatives are put forth with a holistic
understanding of current economic developments.

Six and a half years since the Great Recession, the U.S economy appears to be
prosperous once again. After six consecutive quarters of decline from the third quarter of 2008 to
the fourth quarter of 2009, real GDP has increased in every quarter since then and, as of March
2016, is at a high of $16.4 trillion (BEA). Additionally, the unemployment rate has fallen below
5.0% for the first time since November 2007. This is encouraging because the natural rate of
long term unemployment is 4.9%, suggesting that the economy is now at full potential output. It
is also a far cry from the 10.0% unemployment in October 2009 (BLS). Furthermore, inflation has
been consistently low. After reaching an average of 3.0% in 2011, the percentage change in
prices has been slowly growing at a rate of 1.2% for the past four years (BLS). According to the
Federal Reserve, consistent inflation leads to a) the public making accurate, long term economic
decisions and b) avoiding deflation, which is “a phenomenon associated with very weak
economic conditions.” Lastly, the stock market has surged: the Dow Jones Industrial Average
increased nearly threefold from March 2009 to July 2015 while other markets have also seen
similar gains (BEA). In short, all these figures suggest that the economy has made a complete
recovery.
The National Bureau of Economic Research (NBER) concluded that the recession ended
in June 2009. Based on the information above, we agree with their conclusion. However, because
the NBER’s conclusion depends substantially on GDP growth, it overlooks problems that still
persist for many households. We know that the unemployment rate, often cited as the holy grail
of economic recovery, has improved vastly. However, this figure is misleading for a few reasons.
Since the recession, many workers have given up trying to find a job. The civilian labor force
participation rate in December of 2008 was 66.0% (BLS). As of March 2016, this figure measured
63.0% (see Figure 1). Additionally, if one accounts for workers employed parttime for
economic reasons in addition to the unemployed, the recovery does not appear as convincing.
Data from December 2007 show the unemployed and underemployed population at 7.8% (BLS).
Almost nine years later, this number remains stubbornly high at 10.5% suggesting that there are
still many households who have not felt the recovery (see Figure 2). For many who have taken
part in the recovery and regained their fulltime jobs, they have returned to find that real income
and wages are growing at an abnormally slow pace. In 2007, wages increased at an annualized
rate of 4.0%; since then, the rate has slowed from 3.0% in 2008 to a near halt at 1.5% in 2012
and only barely picked up to 2.1% 2015 (BLS). The first months of 2016 show promise, with
wage growth increasing to 2.3%, but this is still far from prerecession levels.
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Economic theory suggests that as the economy approaches the natural rate of
unemployment, employers must increase wages to attract the scarcer supply of workers.
However, this does not seem to be happening. It could be in part because there are more
parttime workers in the economy, who may ask for more hours before they ask for a raise.
Adding to this mess, state and local governments have cut the number of public sector workers.
Since the recession, even accounting for public sector hiring, there are 375,000 fewer public
sector employees. While we agree with the NBER’s conclusion that the Great Recession ended
in June 2009, many fulltime, highpaying positions have been eliminated and have been
replaced by parttime jobs. For those who remain fulltime, wages are growing much slower than
in the past. So, while the economy has recovered, it has also fundamentally changed, leaving
millions of Americans worse off than they were in 2007.
The result of this changing economy is that wealth inequality has increased, skewing
most of the economic gains to the wealthy. Since the end of 2008, corporate profits after tax have
nearly tripled from $671 billion in 2009 to $1.8 trillion in 2015, mirroring the gains made in the
stock market (see Figure 3). At the same time, real median household income in the U.S
decreased from $55,313 in 2008 to $53,657 in 2014 (the most recent figures available see
Figure 4). A truly healthy recovery is one in which a majority of the population sees gains, and
this is clearly not the case. Compare the unemployment figures for minority populations to that
of Whites and it is even more clear that the gains from the recovery have not been equal. While
unemployment rates for Whites have almost returned to prerecession levels, those of Black and
Hispanic populations remain nearly two percentage points higher (see Figure 5). It appears that
the dramatic increase in wealth inequality since the recession has impacted minority groups even
more.
To understand why income inequality has increased in the U.S, we must analyze the
monetary and fiscal policy decisions enacted during the recession. Additionally, we will analyze
the impact of these decisions on the national deficit and debt as well as current trade policies.
Specifically, we are interested in how effective these decisions were in ending the recession and
whether or not they contributed to the increased wealth inequality we see today.
Monetary Policy
The Federal Reserve combated the financial crisis by implementing a series of
expansionary monetary policies. According to the Fed, the goal of these reforms was to support
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the liquidity of financial institutions and prevent, as former chair Ben Bernanke put it, “a global
economic meltdown” (Bernanke).
The first measure taken by the Fed involved reducing the federal funds rates in order to
promote shortterm liquidity for banks (Rudebusch). This tactic is not profound: it is designed to
lessen the cost of borrowing for banks, leading to more lending by the banks themselves and thus
increasing the money supply. However, it should be noted how aggressive these measures to ease
the burden on banks were. Bernanke commented on the dramatic rate reductions by saying, “in
historical comparison, this policy stands out as being exceptionally rapid and proactive.”
Additionally, the Fed implemented other reforms designed to promote shortterm liquidity for
banks. In particular, the Fed created the term auction facility, which auctions credit to banks for
three months, and approved bilateral currency swap agreements with foreign central banks to
facilitate global financial liquidity (“Response to Financial Crisis”).
The second expansionary measure taken by the Fed involved the use of open market
operations. Prior to the crisis, the Fed policy mainly relied on manipulating the federal funds
rate. The Great Recession changed this. Even after the Fed cut the target rate to zero percent,
banks, whether it was to General Motors or to the local general contractor, remained hesitant to
loan out money; they opted instead to invest in safe 10year Treasury bonds. So, the Fed turned
to an unconventional policy. Quantitative easing (QE) describes the process by which the Fed
purchased risky mortgage backed securities from banks, in addition to buying 10year Treasury
bonds. These two actions served to “ease” the pressure of bad debt weighing on the bank’s
balance sheets and decrease the annual yield of the 10year Treasury bond in order to discourage
the banks from investing in them. Freed of troubled assets and discouraged from safe investment,
the banks were now incentivized to lend to businesses in the real economy, thus achieving the
Fed’s goal of increased credit. The Fed implemented quantitative easing in three stages that
lasted from November 2008 to December 2013. Over the course of five years, the policy
expanded the Fed’s balance sheet by over $4 trillion dollars (Kohn).
As the economy emerged from the recession, the Fed incrementally decreased its asset
purchases until October 2014 (“Response to Financial Crisis”). As for interest rates, the Fed has kept
them consistently low. In their most recent meeting held in March of 2016, the Fed decided to
once again keep the rates between ½ and ¾ percent (FOMC). This trend is in line with the Fed’s
strategy regarding interest rates at the beginning of the recession. In January 2009, Ben Bernanke
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remarked, “the Committee expressed the view that economic conditions are likely to warrant an
unusually low federal funds rate for some time” (Bernanke).
The Fed’s policy decisions in response to the Great Recession can be explained through
longrun and shortrun economic models. Regarding interest rates, longrun classical models
suggest that when interest rates decrease, investment spending by firms will increase. Shortrun
models show that an increase in money supply through open market operations will lead to an
increase in the LM (Liquidity Preference/Money Supply) Curve represented in the IS
(Investment/Savings)LM Model. This will then lead to an increase in aggregate demand, which
will raise output. The implications of this are twofold. First, as stated in Okun’s law, an increase
in output should lead to a decrease in the unemployment rate. Second, as the economy transitions
from the shortrun to the longrun, prices should rise as output and employment are restored to
previous levels. We will discuss whether these changes occurred in response to the monetary
policy decisions later when we discuss the monetary and fiscal policy implications in tandem.
Fiscal Policy
The government recognized that monetary policy alone would not be enough to restore
the economy. Expansionary fiscal policies were needed. In October of 2008, Congress
implemented the first major fiscal policy measure to fight the Great Recession: the Troubled
Asset Relief Program (TARP) (Amadeo). This $700 billion stimulus package, approved by then
president George Bush, prevented many of the largest US banks–such as Goldman Sachs and
Morgan Stanley–from defaulting on their loans. The program also bailed out major automobile
companies such as General Motors and Ford. In essence, TARP was enacted because the
government determined that these corporations, however reckless they may have been, were so
vital to the U.S. economy that to let them fail would have caused even further economic damage.
In February 2009, President Obama implemented his first economic stimulus package,
the American Recovery and Reinvestment Act (ARRA). The goal of the $787 billion spending
plan was to restore confidence in the U.S. economy by stimulating spending and reaffirming trust
in the financial markets. The plan had three major components. First, the ARRA cut taxes by
$288 billion, tying into the plan’s goal of stimulating spending. Second, it allocated $284 billion
in unemployment benefits to help those affected by the economic downturn. Lastly, $275 billion
was distributed in the form of federal contracts and loans to create jobs (Freeman).
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The expansionary measures taken by the government during the recession involved a
combination of increased government spending and decreased taxes. In the shortrun, these
policies are designed to increase the IS curve, which then increases aggregate demand. As
mentioned when explaining the theory behind the monetary policies, increases in aggregate
demand should lead to higher output, higher prices and lower unemployment. The problem with
the ISLM model is that it ignores a few factors such as treatment of expectations and the lack of
a microeconomic foundation. So, in addition to evaluating the impact of the fiscal policies on
output, prices and unemployment, we will take into account whether they affected consumer
confidence and business expectations.
These massive stimulus packages, while beneficial to the economy, rapidly increased the
budget deficit. As a result of the TARP and ARRA, the government deficit increased to $1.4
trillion in 2009. In the years following the recession, the Obama administration has successfully
lowered the deficit. The latest budget analysis from March 2016 projects a deficit of $457 billion
for the first six months of the current fiscal year (BEA).
Compared to last year’s deficit at this time, total receipts, which can be viewed as income
generated by the government, increased by 4 percent. This increase came despite corporate
income taxes declining by $10 billion. Total outlays, which is another word for total government
spending, were also up 4% in the first half of 2016. The main reason for this was an increase in
net interest on public debt, which surged 19 percent (“Monthly Budget Review”). The Congressional
Budget Office (CBO) cited differences in inflation rates as the main cause of this development.
Additionally, spending for Medicaid, Medicare, and Social Security all increased by a total of
$37 billion. Regarding the budget projections for the entirety of 2016, the CBO projects the
deficit to settle at approximately $534 billion, with revenues and outlays accounting for roughly
$3.4 and $3.9 trillion respectively (CBO).
We mentioned that total receipts are expected to increase despite a $10 billion decrease in
corporate income taxes. The CBO reasoned that this occurred because there were lower taxable
profits in 2015. Moreover, they also mentioned that most corporations have yet to make quarterly
estimated payments for taxes in 2016, suggesting that this figure will increase in the coming
months. Meanwhile, individual income taxes and payroll (or social security) taxes increased by
$49 billion during this time. $43 billion of this total was due to an increase in the amount of
money withheld from workers’ paychecks, which was as a result of higher wages and salaries
(“Monthly Budget Review”). While this is not to suggest that money is being stolen from people, it is
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perplexing why the majority of workers bear the brunt of paying taxes while corporations do not
have the same responsibility.
Current fiscal policy also hinges on managing the country’s escalating national debt.
While the Obama administration has reined in the deficit, the national debt continues to grow.
The federal debt, which is projected to be $19.3 trillion in 2016, has increased 85% since 2008
(U.S. Department of Treasury). This trend is concerning for a few reasons. High debt puts privileges
such as Medicare and Social Security at risk because it raises questions about the government’s
solvency and monetary stability (Bohn). In addition, escalating federal debt puts pressure on the
government to decrease funding to state and local governments, forcing them to raise taxes or cut
services to meet their obligations (Hubbard). Another problem is research shows that increases in
debt may lead to increases in real interest rates, and while we don’t go much further in detail, this
may lead to greater reliance on foreign saving (Engen & Hubbard).
Evaluation of Monetary and Fiscal Policies
In terms of countering recessionary forces, fiscal and monetary policy were effective. The
Fed’s aggressive monetary policy was successful at increasing bank lending and investment.
Loans by banks and other financial institutions increased in every month starting in November
2010 while investment increased from $1.8 billion in 2009 to $2.8 billion in 2015 (BEA). These
effects, in addition to the stimulus packages, ultimately increased aggregate demand, as
evidenced by increases in real GDP in every quarter since late 2009. Additionally, recent
research indicates that had no action been taken, the recession would have been even worse
(Blinder & Zandi). The study determined that real GDP would have fallen 14% from its peak to its
trough as opposed to four percent, 17 million more jobs would have been lost, and that the
recession would have lasted twice as long. Moreover, another study found a positive link
between the policies and measures of inflation and GDP growth expectations (Carvahlo). These
studies demonstrate that the aggressive fiscal and monetary policies were at the very least
successful in mitigating the disaster.
However, compared to White House predictions, the fiscal policies in particular fell short
of expectations. For instance, the White House anticipated GDP to grow 4.5% by 2012, yet GDP
ultimately grew only two percent that year. Additionally, the American Recovery and
Reinvestment Act set a goal to reduce unemployment to below 8.0% by 2011, a goal that
ultimately took an additional two years to meet. Furthermore, the ARRA anticipated that the
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deficit would only account for 3% of GDP, yet until 2013, the deficit accounted for roughly 7%
of GDP (Freeman).
Despite its criticisms, we still believe the fiscal and monetary policies were successful.
However, we believe the policies that aided the recovery benefited some more than others. For
instance, in lowering the federal funds rate, the prudent savers of the economy suffered as
interest rates declined. The elderly were also negatively affected as they generally have large
savings accounts. In addition, while quantitative easing successfully increased credit availability
for the public, it also implicitly rewarded banks for their risky behavior that caused the recession.
In buying the banks faulty mortgage backed securities, the Fed took the hit for their irresponsible
lending practices. The fiscal policies implemented in response to the recession also came with
mixed results. The TARP act, pushed through Congress with the message of “save our great auto
industry,” bailed out many of the same financial institutions that contributed to the housing
market crash. While the taxpayer funded bailout has been repaid, the underlying message that
large scale fraudulent behavior goes largely unpunished is troubling for the future of our society.
Mr. Sanders has been very opinionated as to his views of both the Federal Reserve and
recent fiscal policy measures. Regarding the Fed’s policy of quantitative easing, Sanders has
stated that while “well intentioned” it requires reformation to better serve every day Americans
(Sanders). He pushes for the removal of conflicts of interest within the Fed writing “unfortunately,
an institution that was created to serve all Americans has been hijacked by the very bankers it
regulates” (Sanders). Additionally, Sanders is opposed to raising interest rates because he believes
that will hurt small business owners looking to make investments. As for his views on fiscal
policy measures, Sanders was extremely critical of the TARP Act of 2008. In particular, Sanders
was displeased with the idea of a bank bailout, however he did not oppose the bailout of the
automakers because that would have led to a loss in thousands of middleclass jobs (Sanders).
Regarding other figures in the political field, both Hillary Clinton and Ted Cruz agree on
the need for a balance budget. Cruz has introduced a balanced budget amendment and Clinton
urges voters to “Look back to 1990s to see how [she would] be fiscally responsible” (Clinton).
The candidates differ in their views of the Fed. Cruz views their actions as guesswork and insists
that “they are debasing the currency with QE1, QE2, QE infinity!” (Cruz). However, he
acknowledges the necessity for a lender of last resort. Clinton appears more moderate,
advocating the effectiveness of the Fed’s actions and firmly supporting QE.
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Trade Policy
Trade policy is a subject in which there is surprising agreement among the current
political candidates. Mr. Sanders consistently opposes free trade, having voted “no” on the
Central American Free Trade Agreement (CAFTA), North American Free Trade Agreement
(NAFTA) and the most recent Trans Pacific Partnership (TPP).  He views these policies as,
“shipping goodpaying American jobs to lowwage countries overseas” and accelerating the
“race to the bottom for American workers” (“Bernie Sanders on Free Trade”). In some respects, he is
not wrong. Since 2000, the U.S has lost over five million manufacturing jobs and while some of
this is a natural result of globalization, free trade agreements are partially to blame (Long).
Clinton opposes the CAFTA and NAFTA for similar reasons, but contends that the “global
economy needs trade” suggesting a more flexible position on free trade policies (“2016 Presidential
Candidates on International Trade”). While she currently opposes the TPP, she has only recently
come out against the agreement after initially supporting it as Secretary of State. Possibly the
most vocal of the three candidates, Donald Trump firmly opposes the NAFTA and the TPP
saying “ I think our current deals are a disaster” (Garver). While Trump is a free trade advocate,
he states that for effective policy, “you need smart people representing you” which is hardly a
revolutionary idea.
Though their consensus is understandable, free trade is not the evil that many make it out
to be and to impose trade restrictions would be a mistake. When a country imposes restrictions
on imports, net exports increase causing the home country’s currency to appreciate. This in turn
decreases their own net exports. Taken in tandem, global trade decreases which harms the global
economy. Moreover, free trade has led to cheap imports for many consumer goods, raising the
standard of living for low and middleincome households. On a macro level, free trade has many
other benefits: free trade increases development, allows businesses access to new markets, and
encourages competition, which boosts efficiency and lowers prices (“10 Benefits of Free Trade”). So
although free trade does hurt workers in certain industries, the overall benefits outweigh the
costs.

Conclusion
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With these factors in mind, we have suggestions about the fiscal, monetary, and trade
policy measures that you should support as well as three campaign slogan proposals. Since we
cited increasing income inequality as a troubling economic development, you should support
increases in taxes for higherearning individuals as well as some decreases in taxes for
lowerincome households. Additionally, you should regulate offshore tax havens brought to light
through the Panama Papers leak and rigorously pursue domestic tax evasion. Regulation that
reigns in tax evasion will increase tax revenue, lessening the burden on the middle class and
contributing to a lower federal deficit. These policies will decrease both the deficit and the debt
for a few reasons. Higher revenue from increased taxes will not only decrease yearly deficits, but
they will fund longterm investments that will promote economic growth in the future. We also
think increasing government spending towards infrastructure and renewable energies will lead to
both shortterm increases in aggregate output and longlasting effects. In monetary policy, you
should continue to support low interest rates because a hike in rates will be yet another burden
for small businesses and middleclass families. Regarding trade, we think you should reverse
your position because the benefits of free trade, while sometimes tacit, undoubtedly help the U.S
economy. Lastly, we came up with three campaign slogans that are in line with your views and
that speak to the majority of Americans: A Recovery Felt by All, Putting Dark Days Behind for
Good, and Prosperity for Many, Not the Few.

Appendix
Figure 1 Civilian Labor Force Participation Rate

Figure 2 Total Unemployed, Plus All Marginally Attached Workers
Plus Total Employed Part Time for Economic Reasons
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Figure 3 Corporate Profits After Tax

Figure 4 Real Median Household Income in the United States

Figure 5 Unemployment Rate by Race

We know you don’t read past the 10th page. But, you read past the page limit last time. If
you liked what you saw, we added a few more graphs for your viewing pleasure.
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Figure 6 Federal Funds Rate

Figure 7 Commercial and Industrial Loans, All Commercial Banks

Figure 8 Real Gross Private Domestic Investment

Figure 9 Federal Government Budget Deficit or Surplus

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