The American economy has a history of cyclical fluctuations, commonly referred to as business cycles. Declines are characterized by some combination of reduced employment, business investment and consumer spending, resulting in a declining Gross Domestic Product, a broad measure of economic activity.
Two successive quarters of decline in GDP is called a “recession.” An improving economy is characterized by increased employment, consumer spending and business investment.
College economics students are introduced to this concept with the simple equation, GDP = C + I+G + Xn. In plain English, the sum of total spending on consumption, private investment, government purchases of goods and services, and net inflows from exports, is the Gross Domestic Product, or the annual total spending for goods and services produced in the economy.
The sum of these components is “aggregate demand” for goods and services that generates employment. When spending on these components declines, GDP declines. Increased spending represents greater demand for goods and services, which generates increased employment
On rare occasions, we have a more serious, prolonged decrease in spending. The Great Depression was such a period, from 1929 through 1941. The Keynesian style spending programs of FDR’s “New Deal” of the 1930s kept total spending and employment higher than it otherwise would have been. Construction projects on dams and public buildings provided employment for many workers.
Nevertheless, it was the defense spending propelled by WWII that lifted the nation out of the economic doldrums. The massive defense spending amounted to Keynesian economics on steroids. This is the ultimate response to conservative critics who insist that Keynesian economics doesn’t work. History proves that it does.
A more recent economic downturn was the Great Recession of 2007-08. This period was potentially as catastrophic as the Great Depression. Without timely intervention, continued recession could have resulted in worldwide economic collapse.
In contrast to cyclical fluctuations, the American economy faces embedded structural problems that moderating the business cycle does not solve. Structural issues are far more difficult to resolve, requiring measures beyond the Keynesian solution.
Since the Great Recession, the American economy has steadily expanded, with increasing GDP and declining unemployment. But as we all know, aggregate statistics omit important details. Increasing GDP and declining unemployment surely doesn’t mean that the system is working for everybody.
The primary continuing problem with this economy is persistent increasing disparity of income and wealth. The fruits of an expanding economy have not been realized across the economy.
This is not only an economic problem, but a political problem with implications for our democracy. If this economy does not work for a large portion of our citizens, it fosters political instability, political gridlock and the “us vs. them” bitter resentment that we are experiencing today. It is urgent that our system of democratic capitalism works for all. When too many people are left economically behind, the tendency is to want to “blow up the system,” and that is not likely to end well.
There are several aspects of income inequality that need immediate attention. Many working class people still struggle for access to affordable health care. This is especially crucial for those not employed by government, large corporations or academic institutions. It still remains for public policy to resolve this issue. As long as people can’t afford primary health care, can’t pay for prescriptions or skip basic care because they can’t afford it, this will remain a source of exacerbating income inequality.
A second challenge is to replace the longstanding route to middle class status once occupied by manufacturing. Although imports of goods and manufacturing plants being moved across the Rio Grande have exacerbated the problem, many manufacturing jobs have been lost through automation. Even if some manufacturing jobs return from abroad, they will be more technical than traditional jobs on the shop floor and there will be fewer of them.
While there are no simple answers to this vexing problem, the simplistic, unrealistic cry to “return America to the past” does absolutely nothing to solve the problem.
A third challenge stems directly from the second. If manufacturing is to be replaced by another route to middle class, it must start with educational preparation, beginning with elementary and secondary education, that leads to technical and/or college education. The dilemma is that school districts in areas experiencing the greatest loss of manufacturing jobs have experienced the greatest decline in their property tax base for financing elementary and secondary education. These are districts that desperately need to prepare students for future employment, but are least able to financially do so.
The tragic result is that instead of being able to better prepare students at an early age with a quality educational base, areas in the Rust Belt, Appalachia, and other areas left behind, are least able to prepare those students. Meanwhile, students in affluent suburbs are advantaged with top flight physical plant and academic programs including college prep courses. The net result is that disparities in early education lead to ever more income inequality. This, in turn, leads to increasing discontent, resentment and decreasing faith in “the system” by those left behind.
Public policies with which to address these structural economic issues are far more controversial and difficult to achieve than policies to moderate business cycles described above.
It is important to keep business cycles on a rising trend. A strong economy better enables us to address structural problems. But without specific, focused, public policy concentrated on these structural problems, they will linger and fester, leading to ever more political rancor and instability.
In other words, there is much on the agenda, neglected and unaddressed by the Trump Administration, requiring serious attention by those who would replace the existing administration.
Will the moderators of the forthcoming debates address these problems by asking questions in a way that encourages constructive discussion?
Much is at stake — arguably, the future of our political and economic system.
— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears Saturdays in the Monroe Times.
