An Evaluation of Our Current Economy

            According to Martin Crutsinger in Government stimulates savings more than spending, the majority of Americans who received Government transfer payments in May through mediums such as Social Security or the $787 billion stimulus plan in April saved their money instead of spending it.  The savings rate of Americans soared quickly up to 6.9% by May of 2009 from nearly zero percent in 2008. This reflects the consumers’ lack of confidence in the market, causing them to save more than spend.  Some analysts believe that the money will be spent after a few months despite the fact that Americans are currently saving, helping to boost the economy.

On the other hand, others believe that the percentage of savings could increase to 10% and that factors such as high energy prices, which cause higher layoff rates, could cause the stimulus plan to fail. However, all analysts agree that in order for the economy to recover, consumer spending needs to rise.

            Past events such as the rise in energy prices causing massive layoffs, the 5.5% drop in GDP, the total market value of all goods and services produced within a nation’s boundaries within a given year, and the volatile stock markets crippled consumer confidence, a very important factor in a healthy economy as it determines the amounts consumers spend.  If consumer confidence is high, consumers are more likely to purchase high quality and durable goods and services such as houses or cars, as they feel that they are financially backed up and that the economy is stable.  For example, consumers who are confident in their job and the market are more likely to buy a car because they are certain that monthly payments can be paid.  However, if consumer is confidence is low, people are less likely to buy as many goods and services because they fear that the market and their jobs are too unstable to afford high quality and that they would go into an un-payable debt. For example, an individual is less likely to buy a house if their job is unstable because they might have to borrow money to make monthly payments including interest. Lack of spending causes a recession in the economy as no money is circulating and businesses are not able to produce as much.

            In order to combat this recession, Fiscal policy is taken by the government in an attempt to alter total spending in order to have a favorable macroeconomic outcome.  There are two modes of fiscal policy: contractionary and expansionary.  Contractionary mode is applied when the government tries to decrease inflation by encouraging to save money and decreasing total spending in the economy.  Expansionary mode is applied when the government tries to cushion the negative impacts of a recession in the economy (unemployment being a major negative impact) by encouraging economic growth and an increase in total spending.  In the situation in the article, the government used expansionary mode to increase total spending by increasing its own spending, reducing taxes, and encouraging spending by giving the people a $787 billion stimulus plan and a $13 billion one time payment in other government programs to increase consumer confidence.  The stimulus plan gave individuals a one-time payment of about $400 while the latter programs provided about $250 per person.