The United States’ Economic Rut, Essay Example

Gross Domestic Product and Business Cycles          

Economics uses the term Gross Domestic Product (GDP) to measure business cycles and their cyclical functions. The GDP is measure an economy’s monetary production, it does this by using prices from a selected base year (Osborn & Sensier, 2002). The purpose of this GDP is to ensure that the prices which are used for evaluation remain constant, the only reason for an increase in the value of GDP would be due to the higher production from a nation’s certain business. The economic growth is the health of the economy, this is seen in the national as well as the state level, this is reflected in the rate of change the GDP shows (Flood & Lowe, 1995).

The economy’s growth rate tends to vary over times; it goes from periods of strong growth to economic slowdown and vice-versa. When economic growth decreases for two consecutive quarters, this is when the economy is experiencing recession. The term “business cycle” is referred to as the fluctuations in GDP. A business cycle generally has four phases. These are:

1. Expansion
2. Peak
3. Recession; and
4. Trough (Osborn & Sensier, 2002)

Each of these phases can go through an undetermined time frame, it could be weeks, months or even years. When you look at historical data of economies, it comes off to be of a cyclic manner, that’s why it’s referred to as the “business cycle”.

There are numerous observable characteristics or indicators of the economy which we can measure through different government departments. Examples of these are: the Bureau of Economic Analysis (BEA), the Federal Reserve Bank (FRB) and the Bureau of Labor and Statistics. Economic indicators can vary directly or indirectly in relation the business cycle. These can be seen through the observation at a local level. To put this in perspective, here’s an example: when the rate of an economy’s growth moves rapidly forward, businesses tend to produce more, this requires resources such as human capital, thus employment rises. When employment rates start to pick up, consumers start to earn money and spend more, and this then fuels economic growth. Consumer expenditure is then a key determinant of economic growth, it can be seen as large component of GDP. Employment as well as expenditure has a direct relation with the business cycle. In the same local level, when businesses earn higher sales, their revenue would be increasing.

Unemployment, however, is indirectly variable to the business cycle; when there is economic growth, the rate of unemployment falls (Osborn & Sensier, 2002). During a recession, businesses will tend to lay-off their workers in order to save money, and also because they do not require much human capital for their production. Another variable in terms of economics which can relate to the business cycle is observed at a national, state and a local level. This is the inflation rate. Inflation is the term referred to the increase in general price level. This is measured by both the consumer and the producer prices (Flood & Lowe, 1995). This can be explained when we focus on the labor market. When economic growth accelerates, more people are employed, and this along rises with the possibility of labor shortages in some industries; this varies from states and regions.

Everyone is affected by the business cycle at a local level. This is because local economies are made up of households, workers, businesses, etc. To be able to understand this, we must pay close attention to our nation’s Gross Domestic Product (Flood & Lowe, 1995).

Fiscal Policies on the Economy’s Production and Employment

The decisions – when it comes to fiscal policy – has a great effect on people’s everyday decisions and behaviors in terms of households as well as businesses. Changes to indirect taxes can have a big effect on the patterns of demand when it comes to the production of goods and services (Abrams, Clarke & Settle, 1999). The use of indirect taxation can sometimes be justified due to instances like market failure. It is sometimes argued that taxes can also have a significant effect on the intensity of overall efficiency and productivity when it comes to labor. This can also be seen in terms of businesses and their investment decisions. When there are lower rates of corporation tax, other business taxes can cause an increase in that certain businesses fixed capital which is used for investments (Abrams, Clarke & Settle, 1999).

Obama’s Old Deal Review (a direct example)

The article entitled “Obama’s Old Deal”, was written by Michael Hirsch. The issue in which the article address was related to the United States was going through a financial rut under the presidency of Barak Obama. It states that banks were not lending money and the economy was still undergoing high rates of unemployment even after Obama’s first year in the Whitehouse. It compared predictions made earlier to what is actually happening in Wall Street, and it all points to Obama and his decision-making. The article claims that Obama is being perceived as the one who is in the wrong.

According to Hirsch, the White House did not adopt to Paul Volker’s point of view on banking, in terms of risk taking and “proprietary” trading. Volker points out that America’s banks are enjoying federal guarantees on their deposits, whilst American taxpayers are putting their money at risk. Obama as well as his economic team has said to have largely ignored Volker. In one of Obama’s statements, he even said that he was not convinced that Volker could be correct in his views. However, Obama did come into accepting what Volker had to say, and this one incident with the President has lead Hirsch into saying that Obama has not been acting like Franklin Delano Roosevelt (whom he has been compared with in the past, in regards to the Great-Depression).

According to Hirsch (2009) Obama and his economic team did not make enough efforts to change the structure of Wall Street, which was contrary to Volcker’s plan. It states that Obama was definitely not like FDR because his decisions were not directly driven by the White House. Much to Volcker’s dismay, the fundamental structure of Wall Street had hardly changed, and the new law in which Obama said would improve the economy had made the banking elite more powerful. It is believed that this was too much in favor of big banks, and in turn community banks are at a disadvantage. Obama’s administration was also criticized for doing very little to reorient pay packages in big financial houses.

Hirsch states that all of the challenges mentioned required fundamental rethinking of the U.S as well as the global economy. Wall Street is said to be able to remain intact with greater capital reserves, more regulatory oversight and also greater leverage limits.

Obama is said to not have lived up to his comparison to FDR, and unemployment numbers could stay the same all the way until the year 2012. Obama is said to be distracting himself with issues of healthcare. In the end, Hirsch states in the form of a rhetoric question that Wall Street has come out as the bigger winner, and American taxpayers are still at a loss.

JPMorgan Chase

JPMorgan Chase is a treasury Services business. It is considered a top-ranked and full-service provider. This includes their innovative terms of payment, collection, liquidity  as well as investment management. They offer they offer trade finance, financial services institutions, information solutions to corporations, and a lot of other services which cater to middle market companies, small businesses, governments, etc. JPMorgan Chase has over 50,000 clients worldwide and operates their business in 36 different countries. This makes them the largest in the world for providing treasury management services.

Along with this, JPMorgan Chase has assets of $1.6 trillion, making them on of the leading in global and financial services. They come as the third largest deposit base in the United States, falling behind Wells Fargo and Bank of America. This firm is said to top the charts in investment banking, small business and commercial banking, financial services for consumers, financial transaction processing and a great leader in asset and wealth management as well as private equity.

Their key financial data (in millions) in the year 2009 is as follows:

• Revenue: $100,434
• EBITDA: –
• Operating income: $48,082
• Profit: $11,729
• Total assets: $2,014,000
• Total Equity: $171,120
• Net Income: $11,728
• Employees: 222,316 (JPMorgan, 2010)

Analysis

According to JPMorgan Chase.com (2010) the firm JPMorgan Chase has itself been facing economic lows along with the recession which occurred last 2008. Their operating income has gone down since 2007, as well as their assets, continuing to plummet since the 2^nd quarter of 2010. This may be in direct relation to consumer spending as well as financial investments in small businesses and households. Because of the slow growth in economy, people are more hesitant to invest, this greatly affects JPMorgan Chase as a firm.

The firm would greatly be impacted if the government does decide to spend more, it would benefit since its investments include that of government financial services. According to Hirsch (2009) JPMorgan Chase is one of the few large financial institutions which are still benefiting from the economy as a whole. The changes in Wall Street have not been large enough to shake the firm and lead them to bankruptcy, unlike many small businesses. JPMorgan Chase is still steady running. The new law stated by Obama which relates to the structure of Wall Street greatly effects JPMorgan Chase and it inevitably makes the already large firm more powerful. They may be included in the financial firms which may end up controlling and dominating the clearinghouses. Government spending would not affect the firm as much as taxes. They can make use of federal deposits which are largely guaranteed, and in turn put many taxpayers’ money at risk. This is part of Volcker’s view on large banks and indulging in heavy risk taking and “propriety” trading at the expense of taxpayers.

References

JPMorgan Chase & Co. (2010). Retrieved from www.jpmorganchase.com

Hirsch, M. (2009). Obama’s Old Deal. Newsweek. Print.

Osborn, D.R. &, Sensier M. (2003). The Prediction of Business Cycle Phases: Financial Variables and International Linkages. National Institute Economic Review.

Flood, D.F., & Lowe, P. (1995). Inventories and the Business Cycle. Economic Record 71(212).

Abrams, B.A., Clarke, M.Z., &  Settle R.F. (1999).The Impact of Banking and Fiscal Policies on State-Level Economic Growth. Southern Economic Journal, 66(2).