Feng LU: Recovery Started but Far from Prosperity

 date:2010-4-11 9:42:00 source:BiMBA         

Recovery Started but Far from Prosperity

—— An analysis of the U.S. Economy

Feng LU

Professor, Vice Dean of National School of Development

In the beginning of 2009, the US economy was in deep recession because of the sub-prime loan crisis. In order to make a change, President Obama carried out a stimulus package of 787 billion USD and started a series of institutional reforms. At the end of 2009, the US economy began to recover.

However, long-term problems are far from being solved. To start with, fixed investment didn't increase much. Since there were not enough attractive investment opportunities, the US economy heavily depended on consumption, which is not sustainable at all. Secondly, the US unemployment rate increased to 10.1% in October of 2009, while the US debt ratio reached to 83.4% at the same time. Thus, implementing easing fiscal policy to lower unemployment rate was constrained.

Thirdly, though the credit is still decreasing, the inflation is on the way. Then, how to control the inflation in future will be another challenge for the government. At last, the recent improvement in current account may be reversed as the recovery of the aggregate demand.

To solve the problems, traditional strategy may not be enough. Although the stimulus work well in the short run, that does not mean it will solve the long-term issues. To avoid another crisis, the US government needs to focus on adjusting the economic structure, let the economy grows at a lower rate, decrease the fiscal deficit, and put effort to make technology innovations.

Understanding the US economy can also help us to adjust our macro-control policies. Since the external demand is not as stable as the inner demand, we need to be confident that the inner demand is enough to let the aggregate demand reach to an optimizing level. Therefore, the current institution needs to be improved according to our own interest.

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