US Economy and Student Debts
American economy is undeniably the most successful in the world. However, it continues to face diverse problems that need to be urgently addressed before escalating into an uncontrollable crisis that would be difficult to handle. The Obama administration has been trying to solve the matters such as the growing inequalities between wealthy individuals and those who do not have access to the financial and wealth resources. Migrants, such as Latinos, had an opportunity to be integrated into the employment systems in order to solve the widening inequalities. The continuously expanding gap between the rich and the poor will affect the economy in different ways, including changes in the derivatives market and in proprietary trading, the fall in financial regulatory mechanisms, and the decrease of democracy in the country. Moreover, increasing long-term employment for fulltime positions could lead to the increase of family incomes by 2016, improvement of the economy wage bill, and increase of the demand for goods and services. The rising student debt would raise the cost of living for most families, the borrowing of the government, reduced other sectors’ development, and budgetary problems in the state and the entire country. This paper explicates the long-term implications on the U.S. economy of the increasing income and wealth gap, raised employment for fulltime jobs, and growing student debts.
The Long-Term Implications for the U.S. Economy of Increasing Income and Wealth Inequality (Gap)
The American working culture provides that individuals work for a living as well as feel that it is their moral obligation. Therefore, many Americans regardless of their financial status are employed or working for themselves. According to Steinberg, Porro and Goldberg, the 2007 financial crisis caused a reverse in employment leading to increased poverty and wealth inequalities in the country. Notably, the 2007 economic crisis caused many problems that must be resolved. For example, such events as the housing bubble burst dwindled the financial sector. Therefore, the banks could not afford to lend. The construction workers and their contracting companies lost their jobs. Consequently, tax revenue decreased, which provided the government with less profit to foster development.
Shapiro, Meschede and Osoro assert that most citizens in the U.S. have become affluent over the years since President Lyndon Johnson declared the fight against poverty in 1964. However, the poverty rate in the country amount to 25%, and the declining efforts to fight poverty have continued expanding the gap between the wealthy and the poor in the entire country.
As the wealth and income gaps continue to widen, the poor and the middle income workers are forced to work more to pay the elite. Such self-interest contributes to an unprecedented growth in the wealth division since homeowners begin to default on their loans, and shareholders’ securities become worthless. While the elite prosper, a large part of the poorest families will continue suffering in the future. Some of the notable long-term implications of the increasing wealth and income inequality gaps are discussed below.
Future changes in the derivatives market
From the financial perspective, derivatives comprise the largest part of the unregulated financial sector. The International Monetary Fund affirms that derivatives offer traders and sellers the opportunity to engage in their transactions at a further date, hence avoiding any complications in their operations. Elliot and Lewis inform that derivatives have been in use since the 17th century, and most traders have continued relying on them for successful activities in the market. An expanding unregulated sector raises various concerns because it is solely responsible for the growth of institutions and the assurance of a balance between the financially challenged citizens and the wealthy class. Riccards considers that the elite set of financially able individuals have developed businesses that are mainly focused on the generation of profit,s hence affecting the growth of the entire country. Consequently, the future of the American wealth gap situation is faced by unreliable housing bubble as well as financial derivatives. It will be difficult to trade in derivatives in the future because only a few individuals will have the capacity to work in such conditions, hence derailing the market. Their success depends on the ability of many people to participate in the market freely. It will not be easy for the poor to get the opportunity to contribute to the growth of such markets because they do not have the resources to engage in them. Apart from their poverty, they will not have the opportunity to visit school and learn about the significance of derivatives in the process of economic growth.
Future changes in proprietary trading
Sexton affirms that the income and wealth gaps continue to widen proprietary trading, which is unregulated. Proprietary trading provides banks with the opportunity to trade commercial money in the capacity of investment budget. Therefore, the banks have ability to speculate against derivatives made of sub-prime mortgages that they had lent due to their customers’ commercial money. Shapiro, Meschede and Osoro agree that in 1929, proprietary trading played a tremendous role in causing the Great Depression, and in 1933, the Congress passed the Glass-Steagall Act to prevent the future use of proprietary trading and help prevent financial crisis. However, the increase of wealth gap gives power to wealthy people who require such actions to safeguard their interest. The passing of proprietary trading legislation will further contribute to the growth of the housing bubble and its subsequent collapse, but will leave the financial sector if the earnings partially decrease due to the effects of the proprietary trading practice.
Future fall in democracy
Due to the growing division of wealth and incomes witnessed during the financial crisis, it could be noted that the federal government’s ability to work democratically is deteriorating where financial elites are rising to power. Due to its inability to withstand powerful interests from the financial sector, the federal government is losing its ability to govern democratically. According to Schneirov and Fernande, the citizens consider the government legitimate if it is able to maintain control and stability of its society. In tandem with the growing housing bubble and the Great Recession, the government demonstrated its inability to manage the financial sector and subsequently the entire American economy.
The nation’s second worst financial crisis was triggered by deregulating financial sector, which was encouraged by its interests in politics. Doogan states that the result of the government’s inability to protect the economic well-being of American citizens indicates its fading ability to secure the future of the entire country. According to the definition of democracy as a government that is able to listen to its people objectively and protect their interests adequately, the federal government is unable to represent and protect the best interest of taxpayers from the financial sector interests. This reason should challenge the U.S. government to continue working on decreasing the wealth and income disparities among its citizens. Riccards insists that the wealthy class will replace the government and will be in a sole position to make economic decisions that favor their trading activities. In this case, fiscal policies that are usually undertaken by the government will be skewed and focused on protecting the interests of the wealthiest and financially powerful individuals, hence impairing democracy of the economy.
Fall of the financial regulatory enforcement
The financial regulatory enforcement is struggling to follow the increase in wealth and income inequality gap. Therefore, many organizations that it relies on appear to be losing track because they cannot correspond to the financial sector’s growing pace. The financial market has been growing at exorbitant rates. The amount of outstanding credit that sustains the growing financial sector has increased during the past twenty years, and the highest growth occurred in the past decade. Doogan indicates that much of this increase can be attributed to the expanding derivatives market, which is, as stated earlier, increased by 100% from 1998 to 2008.
It is worth noting that the financial sector regulation has continued to lag behind the growing institutions, and the divergence has grown since the escalation of anti-regulatory ideology in politics in the 1980s. Nevertheless, the efforts have been made towards strengthening the regulatory system since the 1980s through adequate financing and support by the government. According to Krueger, Cramer, and Cho, this causes concerns regarding the regulators’ ability to oversee effectively the financial sector and provides insight how the regulators allowed the occurrence of the financial crisis. In the nearest future, the organizations will lack a place to lean the credits in order to boost their business leading to losses or eventually closure. The influence of the wealthy class will overpower the financially challenged citizens, hence making it tough for the financial regulatory mechanism to restore its required efficiency in operations.
The Long-Term Effects for the U.S. Economy of Increasing Long-Term Employment for Fulltime Positions
Baker and Bernstein affirm that one of the key long-term effects of increasing employment for full time positions is that the families whose income is below the poverty line will increase triple by 2016. Most families that are currently living in poverty will have an increase of their incomes in the future since parents get the opportunity to work as fulltime employees with a stable salary every month. This implies that the level of poverty could be alleviated, since most families will have access to the decent housing, shelter, and food. The increase in fulltime employment will also mean that these families engage in other business activities due to their financial power and income availability. Kritikos states that the family businesses will start to emerge in order to increase their income base and meet other rising family needs. The prosperity of families due to the increase in incomes will cause the U.S. economy grow at a desirable level and remain in the dominant position. Continuous dependency of the government and its different projects will gradually reduce, hence leading to stability of the country’s economy.
In tandem with the conventional economic analysis, an increase in the minimum wage would have two significant effects on the employment. First, the employers would have to deal with the high costs of producing goods and services. Krueger, Cramer and Cho confirm that these costs would be passed to consumers, hence affecting their consumption level of different products and services in the economy. For example, they will be required to pay more to cater for the increasing minimum wages paid to fulltime employees in various organizations. Most employers will deal with this effect by producing fewer goods and services using lesser human resources. Baker and Bernstein agree that this issue is commonly referred to as a scale effect, and it could deny other people the opportunity of getting these jobs in the future. The second way is that the increase in the minimum wage follow the increased costs for additional fulltime employees compared to using other production strategies such as machines and more productive higher-wage workers. It is crucial to note that some employees will continue focusing on the profit motive trying to save on their low-wage workers to accommodate high-wage workers. Riccards agrees that this is a substitution effect, which plays an instrumental role in boosting the level of the employment among high-wage employees compared to low-wage ones. However, it is imperative to understand that the conventional economic analysis would not be directly efficient in all situations. For example, when the firms plan to acquire new human resources on a fulltime basis and intend to maintain the current staff, they will have to incur more maintenance costs for them. This implies that increasing the number of fulltime jobs will escalate the overall costs of retaining existing employees and motivate them to realize the economic goals of the company.
There are cases when searching requires much time and high costs among the workers. Kritikos indicates that increasing the minimum wage means that the businesses have to pay the existing workers more in any given case. This is beneficial because it leads to the overall reduction of costs for hiring and retaining new employees within the organization. Most low-wage workers who experience a change in their wages due to minimum wage increases work in the public sector and the government tries to protect their interest all the time.
After a little increase of the minimum wage, some employers try to maintain different system of payment for their employees as it was before. Baker and Bernstein confirm that collective bargaining is used in the determination of some salaries. These usually depend on the costs incurred by the state government in relation to the employee protection. Therefore, an increase in the minimum wage would cause some workers become jobless in cases where they are not producing according to the required levels. New fulltime employees will replace them to ensure that the efficiency of the firm is increased at all levels.
Additionally, some firms, especially those that do not engage in the employment of many low-wage workers, but that compete with firms that do, would witness a rise in demand for the different goods and services since the costs of their competitors gradually increase. Such firms would hire more low-wage workers as a result. The variation in employment of low-wage workers changes with the course of time. First, when the minimum wage increases, some firms could prefer accommodating fewer low-wage workers on a fulltime basis while others continue to follow their system. Sexton asserts that the rise in the demand for their goods and services will also be attributed to the increasing incomes among different individuals. Moreover, the production level will increase, hence leading to the mass production of various goods and services within the economy. The increasing levels of demand will mean that businesses make profits from their activities not depending on a small consumer base. Most families and individuals will have the power to purchase and consume all categories of products, including the luxurious ones in the economy. For example, increasing full time employment could drastically lead to the growth of the products purchase such as cars and other luxurious goods required by the individuals.
Employers might approach minimum wage increases in other modified ways that do not necessarily involve increasing prices or substituting low-wage workers with other appropriate inputs such as machines. For example, they might decide to offset increase of the minimum wage through reducing other costs such as fringe benefits with respect to health insurance or pensions as well as job rewards such as free meals. Employers will be willing to reduce the overall costs of production and increase their profitability. Doogan considers it is obvious that increasing employment for fulltime jobs will require them to incur more costs for sustaining their staff members. Thus, most of them will establish new strategies such as reducing total employee benefits. This will force the U.S. economy to take different direction where most employees are only paid their basic salaries without any form of additionally benefits. However, the reduction of these benefits will take a moderate approach due to the understanding that most of these workers do not have much profit. In addition, Riccards clarifies that most employers will take a moderate approach because they fear to face unfavorable tax treatment, as provided in the tax policy of the country. They will also reduce the training costs for their employees to ensure they deal with the rising costs of human resources within their organizations.
The Long Term Implications for the U.S. Economy of Rising Student Debts
Elliot and Lewis affirm that a consumer finances survey conducted in 2010 indicated that 45% of all American families are burdened with outstanding student loan debts. This rate rose by 33% in 2007. Most of the student debt in America is held by people who are under the age of 35 years. Nevertheless, the economic and financial effects of these debts are felt beyond this age bracket. Currently, most of the people in the United States own a job and receive wages. FICO reveals that most of the individuals from the age of 18 to 60 receive some form of basic payment for their work and are forced to bear the burden of repaying part of the students’ debts, especially defaulters. The increasing students’ debts emanating from defaulters mean that everyone deducted some amount from their salaries to provide these costs. Therefore, it is difficult for some people to receive the required amount of wages since they have to participate in the repayment of the accumulating student loans. The rates at which student debts are being taken and repaid in the American society has a continuously largely fluctuated since 2007. While more students are taking largest student loans, those who have graduated are now paying at a slower rate. The International Monetary Fund shows that the enrollment level has increased in the past years due to the encouragement for education among the youth. Governmental programs to aid in promoting higher education, such as the GED program amongst others, have also greatly influenced people’s decisions to enhance their education towards higher levels. Consequently, the population of people at schools in the United States is growing, thus increasing the level of student debts owed to the state. Moreover, the states have to compensate on the amount owed to them by the students through borrowings from other sectors.
The rising expenses for living in the United States witnessed through high costs of housing, reducing incomes and increasing student debts, merge and lead to severe economic effects in the entire country. Nautet and Meensel emphasize that the high student debts in the United States is affecting the economy negatively and may increase the living costs of every citizen in the country. This will continue happening if effective measures are not adopted to regulate these debts. In the past, student loan debts did not threaten the economy of the state through balancing effects of income and potential. The accumulation of debts was not so high since the students who completed their studies in universities and colleges could procure jobs immediately and start repaying their loans. Such large percentage was accompanied by high and rising income levels. In fact, most of the students could afford to spare a percentage every month in order to pay their student debts. Therefore, there was a balancing effect in the economy since the borrowed amount was equaled by the amount repaid. The state had to bear the burden of giving loans without necessarily getting them reimbursed at the required time for its activities. The increasing burden will continue in a foreseable future and will lower economic activities in different states in the U.S.
The amount that the state is investing in giving students loans is currently higher than the amount being repaid. O’Shea insists that there will be a deficit every year, hence necessitating the government to borrow funds from the other sectors of the government to meet their need. Borrowing finances from the other sectors of the budget will continue to have economic effect on the state. The government will have to save on its expenditure foreseen for some developmental projects to meet the increasing loans of students in the economy. Thus, other sectors and functions of the state’s budget will suffer due to increased student debts.
With the current trend in rise of student debts and costs of living in the state, the projected future threatens the state where the government budget will be stalled. A large percentage of the state’s finances will be delayed due the student debts. The costs of living will increase resulting in lower repayment rates. Moreover, the unfavorable costs of living would raise the debt by forcing students to borrow in order to meet the high fee demands in their respective colleges and universities. Nautet and Meensel reveals that it is threatening that the population will not be in a position to pay their school fees without assistance of student loans. It will result in high rates of the student loans. The state’s responsibility for this process will force sourcing money from its reserve of the budget. When the budget becomes completely strained beyond the stage for more manipulation, the government will have to surplus its financial deficit through increased taxes for its citizens. Moreover, it will be necessary to increase the rate of taxes for its citizens in order to increase the revenue rates and provide the increased budget needs due to the higher rates of student borrowing and lowered repayment rates. Increased tax rates for the citizens could lead to the higher cost of living in the country.
Consequently, the effect of high student loans and debts on the economy of the United States has a cyclical effect that influences all sectors of the economy and all levels of individuals.
The high rate of student loans is also a threat to the future state of retirement security and insurance programs for the retired and the elderly population. The International Monetary Fund indicates that a study conducted by the Boston College Center for Retirement indicated that 62% of the American working population aged between 30 to 39 is projected to have insufficient resources to cater for their later retirement ages. Mishory and O’Sullivan opine that more than 20% of the population at this level has the current debts of more than $50,000. This amount is also at an increasing rate over the years. At the same time, the population ages expected for future retirement is also increased at a large rate. This means that the financial strength and planning required to cater for these individuals when they retire is currently impossible. The inadequacy of retirement savings and planning for the society together with the generally rising costs of living would cause more debts to the citizens, hence leading the country into a financial crisis.
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Mishory and O’Sullivan state that families with parents aged between 65 and 74 years with a housing debt carry an average median debt load of $70,000. In addition to the student loan debts, these debts amounts to huge sums that cannot be repaid from the retirement benefits, pensions, and insurance payoffs. Considering the current situation, most families will not be able to receive adequate retirement benefits, hence leading to the persistence of debts in the economy.
The trend at which the state is heading in terms of loans is one that threatens the ability of the government to support effectively its citizens and ensure the modest standards of living to its citizens. It is vital that the state and trend of student loans as well as their effects on the economy are mitigated to save on the potential terminal future. According to Elliot and Lewis, the state needs to invest hastily in programs and initiatives that will lower the cost of educational tuition. This is especially common in institutions of higher learning. The beginning of the challenge of high student loans and its effects on the economy of the state is the fact that student’s education in these institutions of education is high. The programs, such as offering incentives to the institutions and building more educational establishments, will reduce the costs at which they price their education.
The cheaper university education in the country will be more affordable for students and their families. Nautet and Meensel observe that this step will be instrumental in reducing the number of people who require students’ loans to get higher education. Therefore, this will reduce its effect on the economy and large population of the country since there will be small amounts of unpaid student loans. The burden on the government to provide fees for the students’ tuition would be also alleviated, hence eliminating the need for the government to continuously engage in educational support programs for the students. It is imperative to continue ensuring that students meet their debt obligations to eliminate uncertainties about government finances.
In conclusion, the U.S. government has the responsibility of ensuring that its citizens fulfill their lives in the economy. The government has the duty to ensure that the economy is performing for the benefit of everyone in the country. Increasing the wealth and income inequality gap will harm the economy in the future due to the reduced activities in the derivative markets that require participation of everyone in the entire country. Moreover, it will be difficult for the government to have the democracy of protecting its citizens through fiscal policies due the domination of the economy by the wealthy individuals who use their financial power to rule over others. Institutional regulatory systems in the financial sector will also be weakened due to the control of wealthy individuals. Additionally, increasing opportunities for fulltime employment will have both positive and negative long-term consequences. Concerning its positive side, there will be increased incomes for families, hence improving their living standards and ability to purchase different products.
In addition, there will be situations where firms will have to deal with high costs of labor in the economy and might regulate it by reducing the benefits and allowances that these employees get from the provision of their services. Increasing student loans would overburden other citizens through higher taxation to meet these costs. The effect exceeds the defaulters or those who require more time to settle their loans. Moreover, the government might be forced to stall some of its projects to meet the student loans in the best possible manner. With these events, the government should work in cooperation with economists to ensure that the future of the U.S economy is secured through sound economic policies that capture each of these ideas. Overlooking any of these issues could plunge the economy into a crisis that would need more time to be solved, hence missing other developmental opportunities for the U.S. economy.