United States - Economic Policies


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.




United States’ Fiscal Policy

The U.S. government tends to spend more money than it takes in, and thus has incurred fiscal deficits almost uninterruptedly during the past several decades. The only time when the government managed to balance a budget in recent history was between 1998 and 2001, when the strong economy resulted in higher-than-usual tax revenues. The fiscal deficit reached the highest point since 1945 in 2009 at 9.8% of GDP, but has improved progressively since then; the deficit dropped to 2.4% of GDP in 2015. 

The largest portion of government spending is mandated by existing laws, with a large amount of funds allocated to entitlement programs such as Social Security and Medicaid. Mandatory spending represents nearly 60% of total government spending. The remainder is referred to as discretionary spending, and is determined by the annual federal budget. About half of the discretionary budget is spent on the military and defense, with the other half spent on government programs and public services. 

Nearly 50% of tax obtained by the U.S. government comes from income taxes on individuals, with an additional 10% coming from income taxes on businesses and corporations. Another 35% of collections come from payroll and social security taxes. Excise taxes charged on goods such as liquor, tobacco and gasoline bring in a smaller amount, less than 5%. Tax revenues equaled about 18% of GDP on average between 1970 and 2010. Total tax revenues as a percentage of GDP were about 18% in 2015.

The stimulus package introduced by the Obama administration in 2009 included USD 288 billion in tax cuts and incentives. Less than two years later, Obama announced an extension to the tax cuts that had been introduced during the Bush administration at a cost of more than USD 400 billion over two years. 


United States’ Monetary Policy

The U.S. Congress has established that the monetary policy objectives of the Federal Reserve are to promote maximum employment and price stability in what is known as the “dual mandate”. The Federal Open Market Committee (FOMC) is the Fed's monetary policymaking body. The FOMC meets about eight times a year to discuss developments and the outlook for the U.S. economy and to debate different policy options, including the level of interest rates. The federal funds rate, the main interest rate managed by the Fed, is the rate which deposit banks charge each other to trade funds overnight in order to maintain reserve balance requirements. The federal funds rate is one of the most important in the U.S. economy because it influences all other short term interest rates. 

During the years since the recession hit, the Fed has been very active. Interest rates were initially supposed to be kept low only until the unemployment rate dropped to 6.5% or inflation surpassed 2.5%. However, this specific forward guidance was revamped in March 2014 when the Fed announced that any future decisions to hike interest rates no longer depended on previously-established quantitative thresholds, but rather on the assessment of a broad range of more qualitative information. In an additional response to counter the effects of the recession, in December 2012, the Fed announced an unconventional policy known as “quantitative easing”. This policy involves the purchase of vast sums of financial assets in an attempt to increase the money supply and hold down long-term interest rates. 


United States’ Exchange Rate Policy

The U.S. dollar is often referred to as the world’s currency because it is by far the most used currency in international transactions and also the most widely held reserve currency. Almost two thirds of currency reserves held throughout the world are in U.S. dollars. 

Although the Treasury Department has the primary authority to oversee international financial issues, the Treasury’s decisions regarding foreign exchange are made in consultation with the Federal Reserve. However, U.S. intervention in the foreign exchange market has become increasingly less frequent. U.S. authorities typically let the open foreign exchange market and domestic monetary policies determine rates.


United States’ Balance of payments

Over the past several decades, the U.S. current account balance has been heavily influenced by international trade flows, with the ongoing trade deficit resulting in a consistent current account deficit. Earnings on U.S. assets and investments owned abroad have a very small part in the current account, and a surplus in this category is not nearly enough to offset the large trade deficit. Overall, the current account deficit implies that the value of the goods and services being purchased from abroad by the United States exceeds the value of the goods and services being sold to foreigners. The U.S. current account deficit widened progressively since the 1990s and reached an all-time record and global high of 5.8% of GDP in 2006. The deficit has since narrowed due in part to increased domestic oil production. 

The current account deficit is mirrored by a capital account surplus. The net amount of capital inflows received in the United States from abroad makes it possible to finance the current account deficit. Foreigners continue to invest in U.S. assets and companies, and so the net international investment position of the United States has grown over time. The United States is by far the top recipient of foreign direct investment (FDI). About 80% of FDI in the United States comes from a set of just nine industrialized countries. The UK, Japan and the Netherlands are the top sources of FDI in the U.S. The U.S. manufacturing sector draws about 40% of FDI. 


United States’ Trade Structure

The U.S. is the 2nd leading exporter of goods and services in the world and the number one leading importer. The U.S. has consistently run a trade deficit, mainly due to the dependence on foreign oil to meet its energy needs and high domestic demand for consumer goodsproduced abroad, however thanks to advances in domestic oil production, the energy gap is closing. The main trading partners of the U.S. are Canada, China, Mexico and Japan. Canada is the main destination for U.S. exports, whereas China is the main source of imports. 

The U.S. plays a major role in the international trade system and is generally seen as a proponent of reduced trade barriers and free trade agreements. The United States currently has more than a dozen free trade agreements in place. Among them are the North American Free Trade Agreement (NAFTA), which was created in conjunction with Canada and Mexico in 1994. The United States is also an active member of the World Trade Organization (WTO). 


Exports from the United States

Although the United States has lost some of its competitive edge in recent decades, material goods still represent two thirds of its total exports. The United States mainly exports high-value capital goods and manufactured products, including industrial machinery, airplanes, motor vehicles and chemicals. In 2015, the U.S. exported USD 1.510 trillion in goods. 

The United States is the world’s leading exporter of services. This includes financial and professional business services as well as other knowledge-intensive services. Travel, transportation and tourism services are also a major export. Services represent about one third of total exports. 


Imports to the United States

More 80% of total imports brought to the United States from abroad are goods. Roughly 15% of these imports are in the form crude oil, fuel oil and petroleum products. Industrial machinery, supplies and equipment represent another 15% of imported goods. Almost 25% of imported goods are capital goods, such as computers, computer accessories, electronics, medical equipment, and telecommunications equipment. Consumer goods represent another 25% of imported goods. Cellphones, pharmaceuticals, toys, household equipment, textiles, apparel, televisions, and footwear are the main types of consumer goods imported to the United States. An additional 15% of imported goods are automotive vehicles, parts, and engines. Food and beverages represent only about 5% of imported goods. Services represent only 20% of total imports, and are primarily financial services, as well as travel and transportation. 


Tuesday, 27th Jun 2017, 09:30:27 AM

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