The growth of the gross domestic product (GDP) minus inflation or Real GDP is a good indicator of the growth of the economy. Asset prices are not the economy. Debt is not the economy. The hard work of producing goods and services is. The combined efforts of everyone’s physical labor and brains improve the quality of life year after year. Does that mean it is always desirable to grow the economy at any cost? No, we may desire less work or different work for quality of life or refrain from some production due to environmental impact.
As safety net programs have been implemented, presidents have changed, environmental and safety regulations implemented, and healthcare improved, the economy has not changed drastically. As long as the incentive to work hard the next day is still there the government has a lot of leverage and say on what our values are.
There is little evidence to say people work harder or less when taxes go up or down. Tax laws pick winners and losers or we can add leverage to the national debt in exchange for higher individual net worth.
The other big statistic is jobs. People don’t like threats to their jobs, but that threat is far greater from a dynamic capitalistic system than from government activity. Most job losses are gained elsewhere as humanity developed better transportation, the electricity grid, more tourism, the computer, the internet and so on. Unemployment has fluctuated very little with regulations, taxes, and safety net programs.
The .com, housing, and now the coronavirus have all spiked unemployment. In the cases of .com and housing the economy was positioned around a certain asset and then that asset wasn’t what we thought it was. In time the economy adapts.
The federal reserve has a lot of power over unemployment based on how it sets interest rates. Though there is a lag as businesses have access to more money and then decide to hire. The reason for higher interest rates is to control inflation. Exceptions are usually asset bubbles like in 2000 and 2008. The economy repositions naturally in time.
People will continue to want to trade each other for food, health care, housing, things etc…there is nothing to fear on the economy falling off some cliff as long as the government is empowered to save the day if needed. The economy has transformed itself through many technological innovations, wars, infrastructure initiatives with maintaining consistent growth. Economic growth mostly comes from productivity growth, improving processes, developing technology etc. Once a new technology is developed or a manufacturing process is improved, we don’t lose that ability, we work on the next one. This is not to say asset bubbles can’t happen, but asset prices aren’t the economy. When an asset isn’t worth what we thought it was (.com and housing bubbles) that industry loses jobs but in time the slack is picked up.
The economy is our ability to produce goods and services tomorrow to satisfy our needs. Assets are things that can be traded in for goods and services. In truth, if everyone owns a lot of assets, it puts a strain on labor that needs to work to support those trading in assets for labor. They also have to do more work to buy anything. There is always the temptation for us to create asset bubbles but it wouldn’t hinder our ability to take care of each other. The government can always create demand, deficit spend or print money.
Remembering the Great Depression
“With impressive proof on all sides of magnificent progress, no one can rightly deny the fundamental correctness of our economic system.”Herbert Hoover
(Republican President during the Great Depression)
“No party ever accepted a more difficult task of reconstruction than did the republican party in 1921. The record of these 7 ½ years constitutes a period of rare courage in leadership and constructive action. Never has a political party been able to look back upon a similar period with more satisfaction.”Herbert Hoover
Republicans continued to emphasize balanced budgets and protecting the rich after the economic collapse. Unemployment continued to rise through the remainder of their time in power from 1929 to 1933. The new deal programs helped recover employment but were argued by many not to be enough. Ultimately the depression ended with world war II which included massive government spending, high taxes, wealth of the rich wiped out, and government dictating where production goes.
“Competition has been shown to be useful up to a certain point and no further, but cooperation, which is the thing we must strive for today, begins where competition leaves off.”Franklin D. Roosevelt
- U.S. Bureau of Economic Analysis. Gross Domestic Product. Supplemental Information and Additional Information Tab. Current-Dollar and “real” GDP. https://www.bea.gov/data/gdp/gross-domestic-product. Accessed June 7, 2020.
- U.S. Bureau of Labor Statistics. Labor Force, Employment, and Unemployment 1929-39: Estimating Methods. Table 1 Total Labor Force Classified by Employment Status, 1929-1947. https://www.bls.gov/opub/mlr/1948/article/pdf/labor-force-employment-and-unemployment-1929-39-estimating-methods.pdf. Accessed April 7, 2020.
- U.S. Bureau of Labor Statistics. Databases, Tables & Calculators by Subject. (SEAS) Unemployment Rate. More Formatting Options. All years, All time periods. https://data.bls.gov/timeseries/LNS14000000. Accessed June 20, 2020.
- Macrotrends.net. Federal Funds Rate – 62 Year Historical Chart. https://www.macrotrends.net/2015/fed-funds-rate-historical-chart. Accessed April 7, 2020.