How Did a Worldwide Economy Develop?

Globalization, or the spread of a global economy, also posed potential problems, though. Some American workers suffered when companies moved work overseas. Also, when one country suffered an economic crisis, the entire global community was at risk.

A Crash and Recovery

In the 1990s, the American economy grew strongly. This growth was partly due to the creation of new businesses and jobs in the technology industry.

Many Internet start-up companies, known as dot-coms, were founded during the decade. In some of these, owners and managers used risky business practices. They thought that if the number of customers increased, then profits would increase, too. This worked for some companies but not for all of them.

Investors saw the potential to make profits from dot-coms, so they bought stock in the companies. High demand for these stocks created a stock-market bubble. A bubble is an unstable condition of prices driven above the real value of an asset by buyers hoping that prices will rise further.

When many dot-coms failed to yield a profit, the bubble burst and stock prices plunged. Investment in these companies dried up. Between 1999 and 2001, many dot-com businesses had to close. Other companies, such as Google and Amazon, suffered losses but survived and eventually grew.

In 2001, the American economy entered a recession, partly as a result of the dot-com bubble bursting. A recession occurs when the economy shrinks instead of growing. The September 11 attacks also hurt the stock market, and the transfer of American manufacturing jobs to other countries deepened the recession.

The federal government responded to the economic crisis by lowering taxes, while the Federal Reserve System lowered interest rates to encourage people and businesses to borrow. The economy gradually recovered in 2003 and 2004.

Analyze Charts The stock market and employment suffered as a result of the recession in 2001.

Use Visual Information In which year did the NASDAQ experience its greatest drop?

Questions of Fraud

When the stock market crashed in 2000, Americans realized that fraud had helped trigger the 1990s boom. Accounting firms and banks had hidden companies’ financial situations. This increased their stock prices. Enron, a Houston energy company, exemplified this trend. Enron bought and sold electricity instead of producing it on its own. The company falsely reported billions of dollars in profits. A Texas jury convicted Enron executives of fraud, but it was too late to help investors. Fraud at Enron damaged Americans’ trust of corporations in general.

Increasing Global Trade

The North American Free Trade Agreement (NAFTA), established in 1993, linked the United States, Canada, and Mexico in a free-trade zone. In 1995, the United States became a member of the World Trade Organization (WTO). The WTO works to remove barriers to trade and encourage trade and investment among countries.

NAFTA and the WTO encouraged the United States to negotiate similar agreements in other areas of the world. In 2005, the Central America Free Trade Agreement (CAFTA-DR) created a free-trade zone between the United States and several Latin American countries. The United States also negotiated a free-trade agreement with South Korea in 2007.

Each of these agreements allowed U.S. businesses to sell more goods and services overseas. Meanwhile, foreign businesses were able to increase sales in the United States.

These free-trade agreements increased global trade, but they were controversial. They led some American businesses to move operations to other countries, where worker pay was lower and environmental regulations were weaker.

One of the world’s main trading and investment alliances is the European Union (EU). The EU includes most European countries. In 2004, the EU expanded to include countries from Central and Eastern Europe and the Mediterranean.

Membership in the EU created new opportunities for these countries. It also attracted American investment. Many American banks and other firms opened branches within the EU to have access to its large market. As a result, what happened in the EU could affect the U.S. economy.

Analyze Visuals NAFTA links the United States, Canada, and Mexico in a free-trade zone and increases the trade of goods among the three nations.

Synthesize Visual Information According to the images, what are three trade goods exchanged through NAFTA?

Growing Financial Ties

Globalization brought benefits, such as the expansion of trade opportunities. It also created the potential for new problems for the United States. The banking system throughout the world became closely connected. If the European banking system or the American banking system were to face trouble, both sides would suffer the consequences.

In 1999, most countries in the European Union adopted a shared currency, known as the euro. The countries using the euro were known as the euro zone. By the 2010s, the euro was the second most widely used currency in the world, behind the American dollar. Euro-zone companies held large investments in the United States, and U.S. firms had large investments in the euro zone.

The EU was one of America’s most important trade partners in the early 2000s. As a result, economic problems in Europe could hurt the United States. American entrepreneurs and businesses depend on investments from euro-zone countries to grow new or existing businesses. American businesses also depend on euro-zone customers to buy their products and services.

READING CHECK

Identify Cause and Effect Why was the World Trade Organization formed?

A Weak Recovery

When President Barack Obama took office in 2009, Americans were still experiencing the effects of the economic recession. The unemployment rate for the year averaged close to ten percent. Fourteen percent of Americans lived below the poverty line. Home prices continued to fall.

Analyze Graphs The financial crisis caused many people to lose their jobs, and the unemployment rate increased substantially.

Use Visual Information How high was unemployment in October 2008?

Why Was the Stimulus Controversial?

In 2009, President Obama signed into law the American Recovery and Reinvestment Act. The act aimed to stimulate the economy and reduce unemployment. Through it, Congress supplied funds to create jobs and to increase unemployment, disability, and food stamp benefits. The bill also funded improvement projects at schools and airports and on highways to create jobs and help communities. It also reduced taxes.

A number of economists have argued that the recession would have been longer and more severe without this stimulus. Critics, however, found problems with the act. Some felt that it had been ineffective, was too expensive, and had increased the federal deficit for no purpose. Other critics argued that the stimulus was too small.

The act also reflected sharp political divides between the Democratic and Republican parties. All Republicans in the House of Representatives voted against the act. Only three Republican senators voted in favor of it.

Analyze Visuals Construction projects like this one in Arizona were funded by the American Recovery and Reinvestment Act.

Draw Conclusions Why do you think the orange sign was included with this road sign?

A Paper Recovery

American recovery from the 2007 economic recession occurred slowly. The stock market rallied, and it appeared as if the recession had ended by 2010, in the sense that the economy returned to growth.

Americans still struggled, though. State and local governments reduced their workforces. The national unemployment and poverty rates remained high. In some years, the number of new jobs was lower than the number of young people reaching working age. The number of manufacturing jobs rose, but job creation did not reach pre-recession levels.

Meanwhile, jobs and pay were unequally distributed. Most jobs were at the high and low ends of the pay scale. The financial industry had laid off workers, but employees who kept their jobs received high pay. This frustrated Americans whose taxes were used to bail out the companies that were “too big to fail.”

The largest number of job increases occurred in low-paying jobs. Workers with these jobs had difficulty supporting themselves and their families. From 2009 until 2014, wages fell for most Americans. Incomes then started to rebound. By 2016, median earnings had finally risen to exceed the level they were at before the economic crisis. The unemployment rate, which peaked in 2009 at 10 percent, fell below 5 percent in 2016.

Economic Dangers Persist

In the 2010s, debt crises in the United States and Europe threatened economic stability. Tax cuts, wars in Iraq and Afghanistan, and slow economic growth had pushed America’s debt to near its limit.

The debt ceiling limits the amount of debt that the United States can owe. When the country nears the debt ceiling, Congress must vote to raise the limit, or the country risks default, or failure to repay a debt, and a possible financial crisis. Since 1960, Congress has acted 78 times to raise, extend, or revise the definition of the debt limit.

When President Obama asked Congress to raise the debt ceiling in 2011 and 2013, Republicans refused unless the President agreed to a compromise. Congress had to raise the debt ceiling to keep the country operating, but Republican members were only willing to do that if the President agreed to reduce spending.

Meanwhile, a debt crisis occurred in Europe. Between 2009 and 2012, six euro-zone countries acknowledged that they were struggling to pay their debts and were facing default. Greece was the first country to show signs of problems.

This situation presented an economic problem for the world by putting into question government bonds. If banks are worried about money they have lent to governments, they are less likely to lend money to businesses and individuals. Recognizing this, European and international agencies all provided bailout money.

This bailout brought a temporary solution to the European debt crisis, but a number of countries continued to face heavy debts and a lack of economic growth. It was not clear that the debt problem had been corrected. A danger remained that one or more countries might default on their debts and cripple the global financial system.

Analyze Images Workers in Greece demonstrate against cuts to their pay as a result of the debt crisis.

Identify Main Ideas What caused Greece’s economic troubles?

READING CHECK

Understand Effects What did the American Recovery and Reinvestment Act do?