Across the Western world, economies are struggling. The days of 4, 5, and 6% growth seem long gone, and in their place is long-term stagnation. These days, if the economy isn’t in recession, it’s probably not growing much at all.
Why is the economy so bad right now?
What makes the economy seem so bad right now? There are many factors, but slow growth and income inequality are the main ones.
When we look at the numbers, it’s important to consider the big difference between 2% (the most many western economies seem to achieve), and 4% growth.
Of course, the difference is 2 percentage points, but it goes deeper than that. While GDP is adjusted for inflation (increase in price levels or the money supply), it is not adjusted for population growth.
The U.S. population grew 0.7% in 2013. GDP grew by 2.2% in the same year. Adjusted for population growth, the economy grew by 1.5%. Had GDP grown by 4% in 2013, the population-adjusted growth would have been 3.3%. Thus, a GDP growth rate less than double that of a comparative year can equal a real increase more than double when population is accounted for.
This is the real problem with the low growth rates of the western nations. When population is accounted for, some economies are actually shrinking when income per-person is measured, meaning the average person is getting poorer even when the economy appears to be growing according to official statistics.
Combined with an ever larger share of wealth going towards those who already have very high incomes, and we can see why the economy is so bad for so many people.
How bad is the American economy?
In the United States, the stock market is going up, and the last two monthly job reports have been solid. The unemployment rate has fallen to 4.9%, and wages are up 2.6% over last year.
While those are positive numbers, there are areas of concern. The economy grew by just 1% in the first six months of 2016, which is almost nothing when population growth is factored in. Additionally, business and state investment remains weak, which could undermine future growth. And as mentioned above, many of the income gains continue to be concentrated in the hands of the already wealthy.
At a deeper level, how bad the economy is really depends on where you are. If you are in a growing urban area where the tech industry is vibrant, the economy will feel good to you. If you are in a town built around a factory from the heyday of American manufacturing, the economy will feel like it is in an endless recession.
Will the economy improve?
Are we doomed to a future of slow, stagnating growth, or will boom times come again? Much will depend on political decisions, including those of the next American President, along with the Senate and Congress.
Hillary Clinton has called for expanding college access and affordability, investing in infrastructure, and raising taxes on the wealthy while cutting taxes for the middle class. By contrast, Donald Trump has called for cutting taxes for corporations and the wealthy – the same trickle-economics that has failed to produce adequate growth numbers.
Clinton’s economic plan offers a better chance for economic growth and broadly shared prosperity. By contrast, according to the respected firm Moody’s, Trump’s plan threatens to trigger another recession.
What does this mean? It means economic growth is not a force out of our control. The economy is based on human actions and human choices. If we reduce income inequality and ensure that growth and opportunity are not concentrated in the hands of too few, the economy will grow. If we keep concentrating wealth in the hands of a few, the economy will suffer.
The choice is ours.