Economic StimulusEconomy in the Hospitality industry
Definition
Land labor resources and other agents comprise the economic system of a defined territory. In an economic system, there is production, exchange and consumption of goods and services. Economies comprise of the macro and micro sectors. The macroeconomic sector involves decisions firms make regarding production and output while microeconomics focuses on individual decisions that consumers make regarding consumption of output from firms.
The hospitality industry although seems like insignificant its general performance can be used to assess the overall macroeconomic .Its important to note that the industry is heavily service oriented. For it to thrive therefore, minimal interference by the state is required. That perhaps explains why it has been successful in capitalist economies like the United States.
Since the collapse of the Soviet Union in 198990, command economies have largely disappeared. They were dominant in the former socialist republics of Eastern Europe but capitalism has largely take root even all over the world including the former soviet republics themselves. China, Cuba and North Korea are the only know countries that still practice centrally planned economies.
If the strict ideals of the capitalist economy were to be enforced, the role of the government will only be seen as a facilitator. In the capitalist economies, dominant in the United States and Western Europe, the private sector is left to run important sectors and industries like manufacturing, hospitality, transport and healthcare. The private sector thrives in the capitalist economy set up. The government regulates the sector through a series of laws that are enacted by legislation. Individual firms and consumers are left to make decisions based on preference and need. Market forces dictate prices but the authorities subtly shape the economic trends through regular revisions of monetary and fiscal policies spearheaded by central banks and treasury ministries.
The hospitality industry largely belongs to the private sector. In command economies where the sector was notably absent, hospitality industries did not perform well. Recreation and entertainment are tailored to meet different peoples tastes. The standardized services that were available in the command economies therefore did not contribute much to meet clients preferences.
Market economies go through cycles that reflect the level of activity and growth prospects. Recessions, depression, recovery and growth are all part of the cycle that market economies go through. (Solomou, 1998, p, 6) says that Fluctuations of economic activity are a feature of modern economies that little can be done to avoid. According to Adelman (1960), business cycles are propagative or impulsive (as quoted in Solomou, 1998, p 9). Propagative business cycles are as a result of the internal workings of the economies. Parameter of multiplier and accelerator effect work to generate business cycles (Solomou, 1998, p, 9). Impulsive business cycles on the other hand are caused by exogenous shocks on the economy (Solomou, 1998, p, 9).
During such cycles, governments took measures like increased spending that sought to reverse negative trends or stem the collapse of the economy altogether. The world recession that started in 2007 is one such cycle that resulted in the decline of many world economies. The hospitality industry was among the industries most severely affected by the recession. The massive layoffs shifted people spending patterns to focus only on necessities rather than luxuries. Tourism, recreation and other sub sectors of the hospitality industry that depend on direct spending were affected because consumers considered their services a luxury. Declining revenues and negative growth in the industry has generated calls for a second stimulus package that will encourage more spending in the industry hence accelerate its recovery.
Role of government in economy
Whether an economy is command or free market, the role of government is critical. Governments play an entrepreneurial, regulative and rehabilitative role in economic development (Adelman, 1999, pp 1-8). Governments boost investment through increased spending. Government spending is crucial in sustaining economies and in some cases governments are the biggest employers. Keynesian economics tend to be biased towards the government as well. According to the theories, private sector alone cannot make decisions that will ensure sound economic development is realized. Monetary policies by central banks and fiscal policies by government planning ministries according to Keynes should always be actively involved in economic decision making to ensure a stable economic climate.
The Keynes model advocates for an economy that is largely controlled by the private sector but with the government and public sectors actively involved in making decisions. However, industries like the hospitality can hardly succeed with much government involvement. After the Great Depression of 1930s, the theory gained momentum and was used by many governments to justify intervention in economic matters. The recent economic crisis of 2007 has again thrown the focus on Keynes theory of economics and many countries have done more or less of what its recommendations are, during that period.
The 2007 recession, whose genesis was in the US housing market is blamed in some quarters as a result of poor oversight by the American government and over reliance on private sector players to make major decisions regarding the economy. Keynes economists advocate for a mixed economy where both the private and public sectors thrive with joint ownership of properties. The resultant bailout and stimulus packages in the US after the financial crisis served to underscore the importance government can play in economic development.
Role of US government
Though largely a capitalist economy, the US economy the US government plays a critical role in shaping growth, stability and role in the World (Slater, David, National Research Council (U.S.) Committee on National Statistics, 1998, p1). The governments borrowing, spending and taxing policies affect the entire economy including the hospitality industry. Generally the spending of the US government on the economy has increased since 1992 (Slater, David, NRC, CNS, 1998, p 1). Like any government would, the US government facilitates a conducive business atmosphere which allows the thriving of the private sector. Regulation of the economy is another role played by the US government. The recent enactment of the healthcare reform bill once again proved the regulatory role of the government. Insurance companies were subjected to drastic laws curtailing freedoms that were once thought to be a preserve of the private sector.
US economy
The United States has the largest and most advanced economy in the world. As a result most economic agendas pursued by other countries consider the US position before any decisions are reached. From 1945 the world economy was largely dominated by Americans and the American economy (Agnew, 1988, p 1). However, the position of the US economy has always come under threat from global events that have served to prove that it does not enjoy the untouchable status that it once enjoyed. The continued growth of Chinese economy in particular has threatened to challenge the dominance of the US in the world economic matters. Nevertheless, its importance cannot be underestimated as many countries still depend on the dollar for pegging of their currencies and for holding reserves.
Sectors of the US economy
Generally, the economies of various countries are divided into public and private sectors. Within these sectors are thriving sub sectors that comprise of primary, secondary tertiary and quaternary sectors. They are defined based on the goods they produce and the level of refinery of the goods and services. According to Economy watch, the services sector is the biggest sector in the US economy. In the year 2008 when the country GDP grew by 2.8 in the second quarter, the sector contributed 67.8 towards the GDP of the US. In 2007, the services sector contributed 78.5 to the GDP way above the 20.5 that the industrial sector contributed (Economy watch, n.d, p 1).
The US economy has numerous sectors including the following Mining, Finance and Insurance, Real Estate, rental and leasing ,Manufacturing, Wholesale Trade, Retail Trade, Transportation, Information, Management of companies enterprises ,Utilities, Construction, Administrative, support, waste management remediation service, Educational services ,Health care social assistance, Arts, entertainment, recreation, Accommodation food services, Professional, scientific, technical services (Economy watch, n .d ,p 1).
The agricultural sector employs many people in the country but its contribution to the GDP of the US is a distant 1 (Economy watch, n .d, p 1). When calculating the value of its GDP, the US economy is divided into three sectors. The Services sectors which accounts for 76.9 of the GDP, the agricultural sector that accounts for 2.1 of the GDP and the industrial sector that accounts for 21.9 of the GDP, according to 2009 estimates. The hospitality industry therefore falls in the services sector that comprises the bulk of the US economy. There is always interdependence between the different sectors of an economy and the American economy is not excluded. These sectors provide employment to the people who in turn pay for services in the hospitality industry. In a nutshell, the hospitality industry is sustained by the stability of other sectors of the American economy.
Hospitality industry in general and in US
The hospitality industry of the US like in any part of the world, depend on the spending patterns of people in the economy. According to the American Hotel and Lodging Association, the industry employs 1.8 million people directly. It also supports a further 8 million through air travel related jobs (Patel, 2009, p, 1). According to the U.S. Department of Commerce, Bureau of Economic Analysis, the hospitality industry comprises of the arts, entertainment and leisure sectors and the accommodation and food services sector (Department of Labor, Employment and Training Administration, 26, p 6). The report further said that the accommodation and food services sector represented 2.6 of the GDP in the year 2004, equivalent to 308.1 billion (DLETA, 2006, p 6). The recession that hit the country in 2007 resulted in the loss of over 8 million jobs in the US. Such losses impacted directly on the hospitality industry since recreational spending reduced drastically. The accommodation and food services sector is responsible for 8 of the total workforce in the US. However, the US Bureau of Labor Statistics predicted in 2007 that the industry was expected to add 17 in wage and salary employment between the years 2004 to 2014. The food services and drinking places are expected to add 16 of wage and salary jobs within the industry in the period 2004- 2014, equivalent to 1.6 million new jobs (US Bureau of Labor Statistics, 2007). The industry has many entry level jobs in the US providing many young people aged 16-19 with jobs. They comprise more than 21 of the industrys workforce.
However, stereotyping of the industry as low and entry level coupled with the youthful employees has made the industry experiences high employee turnover. High turnover of employees is one of the traditional problems that are associated with the industry even in the course of strong economic performance. Economic down turns like the recent one that led to unemployment affected demand of the hospitality industry services. That, together with declining real wages sparked layoffs in the industry which coupled with the generally high turnover rate to make matters worse.
The US government introduced the stimulus package that was meant to jumpstart the economy. The money was supposed to be spent in various projects especially in green energy that would have boosted hiring therefore reducing unemployment. Returning people to work is overally advantageous to the hospitality industry because more people will be able to afford recreation spending. The kind of deficit spending that the US government is undertaking during the time of recession is in line with Keynesian theory. However, in the 787 billion stimulus proposed by president Obama, the hospitality and lodging industry was largely ignored (Patel, 2009, p, 1). There are individual actions that the government should have taken or should take to enable quick recovery of the industry. In an economic climate like the one the US is struggling to exit, it will make perfect sense if an industry that can provide real stimulus to a faltering economy is protected (Patel, 2009, p, 1).
Measures government can take
According to Keynes the demand for goods and services during economic downturns may dwindle. It has happened in the hospitality and lodging industry in the US. Price Waterhouse Coopers estimated a fall in bed occupancy in hotels in the US of 5.2, in the year 2009 (Patel, 2009, p, 1). It was the steepest decline in the last 20 years in an industry that generates 116 billion in tax revenues, according to the American Hotel Lodging Association (Patel, 2009, p, 1). That calls for some level of induced investment meant to stimulate the economy. Thats where the role of the government comes in market economies like US. Reduction of interest rates by the Federal Reserve and the enactment of stimulus measure for example the one undertaken by the US government and other governments in the world, are typical Keynesian ideas. Government spending is directed towards infrastructure spending while interest rates are meant to encourage lending to ensure credit flow in the market. While the stimulus package may help other areas of the economy, it fails to mention the hospitality industry, which is being hit hard by the recession (Patel, 2009, p, 1). A second stimulus in the United States may be necessary to stimulate the economy further after the first one had modest success. Hospitality and lodging industry should be the primary focus since the first bailout and stimulus money concentrated on the financial and automobile sectors. The US 2009 lodging report released by Earnest and Young said that additional federal dollars injected in the countrys infrastructure whether in the hospitality industry or otherwise, will lead in a net gain for the industry in the long run. That will be through improved access to tourist destinations and the improvement of domestic travel industry. Besides, any stimulus package that will be aimed at aiding other industries will help save the hospitality industrys property market. Low mortgage delinquency rates have made hotel values drop and the properties are being sold in throw away prices.
In post 911 attacks, the American Hotel and lodging association proposed to congress some stimulus measures that were to help resuscitate the industry. The hospitality industry at the time had lost property and customers were reluctant to travel. The bedrock of the plan was to get some few tax breaks as well as liquidity adjustments. That could have attracted people who could otherwise reluctant to spend in recreation and traveling. The tax incentives included a spousal travel tax deduction and an increase in the business meal and entertainment tax deduction (AHLA, 2001) as quoted in hospitality net. The same stimulus measure will apply in the year 2010 but a little differently because the magnitude of the problem is bigger.
Reduction or suspension of taxes deductions that are levied on people traveling with families will encourage more families to reconsider their position in the course of the economic recovery. Further, the taxes levied on any entertainment that families will have to be halted temporarily to encourage travel and recreation.
Payroll tax payments of employees and employers should be temporarily cut or deferred altogether. The money saved through such halting of tax payments will ensure increased income for the employees as well as employers hence reduce financial stress that may spark layoffs. Additionally, the eligibility for qualification for Small Business Loans for the hospitality industry should be extended. The stimulus will create a fund where small hospitality industry businesses will apply for loans to boost their liquidity levels.
The current economic climate has ensured many hotels and other hospitality industry business run short of cash. Hotels have also reported reduced bed occupancy rates due the unsold rooms. Special offer packages to American residents can do a lot to kick-start the growth efforts that hospitality industry may need it. Some of the stimulus money therefore will have to be used to extend subsidies to the hotels so that they can reduce prices customers have to pay.
The view by classical economists that non-intervention in the economy by the government was the way to go contradicted sharply with that of Keynesian theory. The government according to him (Keynesian) needs to prod the economy if any growth was to be realized. In cases where there was increased spending by the government, the imbalance created would lead to increased aggregate demand. Businesses will react by increasing the workforce by hiring more employees. It assumed that the increased government spending will enable all industries including the hospitality industry to hire. The stimulus bill enacted last year plus any other that may aim to bailout the service industry, will therefore encourage more hiring in the sector hence accelerate recovery.
Conclusion
The importance of the service industry in economic growth and development cannot be underestimated. The hospitality industry employs 8 of the American workforce. There have been concerted efforts by the American government to prop up the economy out of the recession. The bailout and stimulus packages have worked modestly so far and hiring is somehow picking up again. The stimulus bill to a large extent ignored the hospitality industry and concentrated on industries like construction and the financial services.
Part of reasons may have been the difficulty associated with bailing out hospitality industry businesses since they only serve a small number of people. Further more they were not directly hit by the economic downturn as were banks. The hospitality industry was largely a victim of circumstances suffering from the effects of the collapsing financial sector. Its recovery will depend on the direction of the economy as far as unemployment is concerned and any other programs the government may rollout in reviving the economy.
Even if there is likely to be another stimulus package in the spring, its highly unlikely that the hospitality industry will be factored in directly. The nearest that the industry will gain will be from a common fund that will be set up to enable businesses access cheap loans. That may be only appropriate for small and medium enterprises in the industry. The big corporations in the hospitality industry will have to depend on credit from financial institutions, an option that may not be economically viable given the uncertainty in the economic growth prospects in the country.