My comment :The U.S economy in last few years (2007-2010) was in the deplorable condition. Although it has passed through the worst conditions which occurred during the financial crisis of 2008-2009, but the situation of economy still looks shaky and not very conducive to higher economic growth. The growth rate is moderate and unemployment situation continues to be worrying as unemployment rate is still at around 8.1%. The private sector is not spending much and continues to be in surplus which has necessitated large public deficit to avoid a deeper slump. This has translated into large fiscal deficit in the United States (about 8.5% of GDP). The inflation in the economy is at lower levels and the growth is moderate, implying a situation of stagnation. The situation could better be specified as a situation of liquidity trap because although interest rates are at their lower bounds, the investments are not very large and continues to be at lower levels. Moreover, the current policy of Quantitative easing (because of lack of demand) has not benefitted the economy as expected and therefore has not been inflationary.
Yes, the data given on stock markets makes me surprised. Although situation of economy is still grim and shaky, the stock market continues to bullish over the years (especially after 2009). The current unemployment and investment situation in United States is not very encouraging but the fact that the investors (both domestic and international) has still shown interest in the Stock market of United States made myself to be surprised.
The other shocking figure is given by investment situation in the economy. The interest rate in United States is very low (almost touching the lower bound); but the situation on investment frond is discouraging. The private players still continues to be surplus and are not showing much interest in investment.
Prof comment :Although the effectiveness of Quantitative Easing has been debated, I have seen some credible statistical analysis that claimed that without QE, some 2 million jobs would not have been created. However when the economy is in a liquidity trap and interests rates at the Zero Lower Bound (ZLB), which other government policy might be more effective than using monetary policy?
Any thoughts, anyone, about the so-called "fiscal cliff"?
My comment: The other government policy which could be effective are: 1) the government can restructure the tax system; under new system it can collect more taxes from rich people and reduce taxes from middle class for e.g buffet tax system. this would increase the disposable income of people and thereby would cause increase in aggregate demand; 2) the government needs to spend more on infrastructure, roads, capacity building activities and confidence building measures. It would be helpful in reviving the economy by increasing the aggregate demand. With this increase in aggregate demand, investor confidence is likely to increase and they are more likely to participate in productive activities. thus the economy would revive very quickly.
Prof comment :I have added two slides at the end of my slide deck; they are about business investment and residential investment. I would like you and anyone else to analyze these slides in order to illustrate what you mention in your comment. Do these slides support what you wrote?
My classmate comment:I looked at the two slide the professor added. Although the slides indicate that residential investment is increasing at a slow rate, private investment is moving forward. If one follows your idea of increasing taxes for the rich and reducing taxes for the middle class, the US will see an even slower investment by the private sector. The "rich" will not utilize more of their disposable income because their businesses will have higher taxes to pay. This goes for the middle class as well. When you state that the middle class will see a reduction in taxes, you make a false statement. Consider who is making residential investments. The middle class may see a reduction in their personal income tax, their small to mid-sized business will incur an increase in "corporate" tax. All I am saying is that a governmental restructure of the tax system is more than simply taking from the rich, lessening the burden of the middle class, and giving to the poor.
As far as your second point, government spending on infrastructure - i.e roads. Look around Houston, construction is everywhere, therefore, aggregate demand is increasing ..... just not at a fast enough rate to satisfy the economists.
Prof comment : If business investment is increasing, isn't it because firms expect aggregate demand to increase in the near future; that seems to be the most important factor affecting business investment. Isn't it? Anyone?
Note also that the statistics that are presented are for the whole country, not a particular state or region, although it is true that there have been some improvement almost everywhere.