Economy 101
Contents
2014/05/19 User:Tharrisn
The economy consists of the production, distribution or trade, and consumption of limited goods and services. The part of that with the most impact on your future is the “production”. The “national family” can only spend/consume as much as it makes plus what it borrows minus what it pays in interest on the national debt. The most important factor in your future well-being is the “family income” i.e. GDP.
There are a number of ways to measure economic activity of a nation. If you think of it as a family, the key factors are how much do we earn, how much do we spend and how much do we borrow.
Indicators of the health of our economy
- Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a year. GDP per capita, adjusted for inflation (purchasing power parity – PPP), is often considered a strong indicator of a country's standard of living.
- Government debt, like a home mortgage, is not necessarily a bad thing. But, it always means that we are causing our kids to pay for our spending. We are now heavily in debt and its projected to increase for the foreseeable future.
- Government spending per capita
Values shown in the two tables below are for the beginning of that year
| President | Reagan | Bush I | Clinton | Bush II | Obama | |||||
|---|---|---|---|---|---|---|---|---|---|---|
| 1980 | 1984 | 1988 | 1992 | 1996 | 2000 | 2004 | 2008 | 2012 | 2014 | |
| GDP per capita ppp | $25k | $28k | $33k | $32k | $37k | $40k | $43k | $45k | $45k | $45k |
| Government debt – trillions | $0.9 | $1.6 | $2.6 | $4.1 | $5.2 | $5.7 | $7.4 | $10 | $16.7 | $17.5 |
| Gov’t spending per capita | $4.2k | $5.8k | $7.3k | $9.2k | $10.2k | $11.2k | $14.2k | $17.6k | $19.6k | $19.8k |
Sources of data for the table above:
United States GDP per capita
Historical Debt Outstanding - Annual 2000 - 2012
National Debt by Year
2014 Google 2014 National Debt
Government Spending Details
National debt is estimated by the Congressional Budget Office to be 26.1 trillion in 2023
Indicators that impact you directly
The most important economic factors in determining the quality of life in your future are
- Having a job:
- U-3 is the official unemployment rate, which is the proportion of the civilian labor force that is unemployed but actively seeking employment.
- U-6 unemployment rate counts not only people without work seeking full-time employment (the more familiar U-3 rate), but also counts “marginally attached workers” and those working part-time for economic reasons.
- Their recent history can be seen here:
- Note that some of these part-time workers counted as employed by U-3 could be working as little as an hour a week. And the “marginally attached workers” include those who have gotten discouraged and stopped looking, but still want to work. The age considered for this calculation is 16 years or older.
- For a deeper look:
- Having a job that pays well.
- The primary indicator for “pays well” is average salary. The numbers in the chart have been factored to account for inflation by adjusting to the buying power in the year 2011.
- The rate of inflation.
- Rate of inflation is not a major factor in most years, but at the 1980 level – 13.9% – it’s a major factor.
- Interest rate is not a major factor in most years, but at the 1980 level – 15.7% – it’s a major factor.
| President | Reagan | Bush I | Clinton | Bush II | Obama | |||||
|---|---|---|---|---|---|---|---|---|---|---|
| 1980 | 1984 | 1988 | 1992 | 1996 | 2000 | 2004 | 2008 | 2012 | 2014 | |
| Unemployment U3 | 7.5% | 8.0% | 5.7% | 7.0% | 5.6% | 4.0% | 5.6% | 5.0% | 8.3% | 6.3% |
| Unemployment U6 | 12% | 15% | 10% | 13% | 10% | 7% | 10% | 8.5% | 15% | 13% |
| Average salary (2011 $) | 20659 | 21739 | 24475 | 23806 | 26428 | 29795 | 29000 | 28755 | 28281 | - |
| Rate of Inflation | 13.9% | 4.2% | 4.0% | 2.5% | 2.7% | 2.7% | 1.9% | 4.3% | 2.9% | 1.6% |
| Interest rate (prime) | 15.7% | 11.5% | 8.5% | 6.5% | 8.25% | 8.75% | 4.25% | 6.5% | 3.25% | 3.25% |
Sources of data for the table above:
Unemployment Rate - U-3
Unemployment Rate - U-6
Broader Unemployment Rates Going Back to 1900
United States Census Bureau
Historical Inflation Rates: 1914–2014
Wall Street Journal, Prime Interest Rate History
It’s clear that substantial improvement in our economy occurred only during President Reagan’s two terms, President Clinton’s two terms and President George W Bush’s first term.
When Pres. Reagan took office in 1980, our country was deep in the Cold War; intercontinental ballistic missiles targeted critical locations in both countries; and our military forces were still recovering from the end of the unpopular Vietnam War.
Eight years later the Soviet Union had been dissolved and it’s once “Republics” freed as their own nations. And, our economy experienced a remarkable recovery. The unemployment rate declined from 7.5 percent in 1980 to 5.7 percent in 1988. The inflation rate declined from 13.9 percent in 1980 to 4.0 percent in 1988.
A Republican, President Reagan was able to get this done with the Democrats in control of the House of Representatives for the first six years and both the House and Senate in the last two. His approach to defense and foreign policy was “peace through strength”. His approach to the economy was called “Reaganomics” and the four pillars of Reagan's economic policy were to reduce the growth of government spending, reduce the federal income tax and capital gains tax, reduce government regulation, and tighten the money supply in order to reduce inflation.
His campaign motto in his 1984 bid for re-election was: “it’s morning in America” and he carried 49 of the 50 states
Democrat President Clinton’s economic approach entailed a perceived modernizing of the federal government, making it more enterprise-friendly while dispensing greater authority to state and local governments. The ultimate goal involved rendering the American government smaller, less wasteful, and more agile in light of a newly globalized era. For the first two years of his presidency, Democrats controlled both chambers of Congress. For the last six years. Republicans controlled both chambers of Congress. In his 1996 State of the Union address, he declared, “The era of big government is over.” And it was – but not for long.
Economic Policy of Bill Clinton
Republican President George W Bush administration increased federal government spending from $1.789 trillion to $2.983 trillion. The era of big government was back. In his defense, it should be noted that the attack of 9/11 occurred eight months into his presidency and his first priority became the war on terror – including the wars in Afghanistan and Iraq. His political philosophy was “Compassionate Conservatism that stresses using traditionally conservative techniques and concepts in order to improve the general welfare of society. Liberals attacked this as a political ploy, with no real meaning, just to obtain votes. A conservative commentator described Bush's version of conservatism as "big-government conservatism”. For whatever the reasons, by the end of his presidency, we were in deep recession – with a peak U3 unemployment rate of 10% – and the national debt had doubled.
Understanding the current situation
The state of our economy and how to make it better is complex for even the best economist to understand. President Truman once said: “Give me a one-handed economist! All my economists say, On the one hand… on the other. With that in mind, only the aspect most important for most people – unemployment will be addressed here.
The most often used “fact” to measure economic health is the unemployment rate. The definitions of unemployment rate that are most used are the Labor Department’s definitions.
- U-3 is the official unemployment rate, which is the proportion of the civilian labor force that is unemployed but actively seeking employment.
- U-6 unemployment rate counts not only people without work seeking full-time employment (the more familiar U-3 rate), but also counts “marginally attached workers” and those working part-time for economic reasons.
Their recent history can be seen here:
Note that some of these part-time workers counted as employed by U-3 could be working as little as an hour a week. And the “marginally attached workers” include those who have gotten discouraged and stopped looking, but still want to work. The age considered for this calculation is 16 years or older.
For a deeper look:
Assessing how the plan is working is a very controversial issue since the magnitude of the problem is not well defined. This leaves the major issue wide open to argument in the political arena. Without doubt, the progress from recession to recovery is a contentious political issue beset upon by both parties, putting the unemployment rate smack in the center of the debate. The Democrats point to the U-3 rate— about 6.5% in 2014 —and argue that things are going well. The Republicans point to the U-6 rate—about 12% in 2014 —and argue that we haven’t made enough progress and having 12% of our workforce without a job is unacceptable. Of course, the politicians can’t agree:
- The Democrat leadership position is: we’ve it made much better, just give us some more time.
- The Republican leadership position is: it’s gotten some better but it’s still bad and with the increase in spending (including Obama care) and the projected national debt, it will only get worse.
