The State of the American Economy

One of the biggest questions in American politics is, “what is the state of the American economy?” Depending on who you ask, and the context of the question, will determine the answer. Before November 7th, 2016, most Democrats viewed the economy favorably while Republicans thought it was performing slowly. Today, those roles have changed– I wonder why? But even before that, answers depend in partisan contexts. Take the progressive left, they thought the economy was doing poorly in the American middle class in the context of income inequality with the rich, but when the context switched to the Obama legacy it suddenly became okay.

In truth, both answers are right. America is the richest and most prosperous society in the history of our world. Even our poorest state, Mississippi, measured by GDP per capita in 2014, was richer than advanced economies like Italy, South Korea, and Spain. All but two states are richer than France, all but three states are richer than the United Kingdom, and all but twelve are richer than Germany, Denmark, and Sweden. Even when limiting our investigation to the poor, over ninety-eight percent of those in poverty have televisions, ninety-two percent have microwaves, over half have central heating, and over two percent have pools. Poverty in America is wealth for the vast majority of human history and the majority of the world today.


But while the broader outlook paints an incredibly bright picture for the American economy, a closer look shows serious problems. I want to focus on two major ones– economic growth, and the labor participation rate. While these are part of long term trends, real GDP growth and nominal GDP growth have not been over three percent and five percent a year respectively for over a decade now. This disastrous trend is because of multiple factors, and has multiple implications. Economic growth is driven by productivity gains, which come from either increase in the labor force or increases in capital investment. Real output per person in the last decade, with the exception of 2009 and 2010, has stayed below a growth rate of two percent a year. Similarly, civilian labor force growth has slowed to less than one percent in the last decade, except for 2016, and growth in Gross Private Domestic Investment has stayed below ten percent since the mid-1980s. These are the basic factors which contribute to decreased growth. But why are all of these indicators going in the wrong direction?

These are multiple deeper causes. One is the inherent feedback loop for being a richer economy. As economies mature and become wealthy, they enter the fourth and eventually the (theoretical) fifth stage of the demographic transition model, meaning both birth and death rates stabilize at little to no growth, even negative as in the case of Japan. Another is the massive size of the federal government. Today, Washington DC spends the equivalent of twenty percent of our GDP– or roughly the size of the Japanese economy. Total government spending, including DC, states, and localities, is about thirty- six percent— larger than every sovereign economy, except China. Most economic research puts the optimal size of government growth somewhere between fourteen and twenty-two percent. Even the highest estimate, twenty-nine percent, is dwarfed by actual spending. Beyond these limits, we run into the crowding out effect.
Lastly, another problem we have is the growth of the bureaucratic state of Washington and in the state capitals. For example, the pages for federal regulation increased by twenty thousand pages from 2005 to 2015. This is not even getting into state policies, like unnecessary licensing laws which exist to protect the wages of existing workers, over the interest of the consumers. In total, the Mercatus Center at George Mason University found an “average reduction in the annual growth rate of the US gross domestic product (GDP) of 0.8 percent.”

Lastly, on the subject of economic growth, what does it all mean? If beginning in 1952, America had two percent growth, per capita GDP would be at $25,483, or half of what it is today.

Another problem we have is the labor participation rate. While the civilian labor force is down, that is to be expected with the exit of baby boomers from the economy. What is not to be expected, is the decline for those between twenty-five and fifty-four, while the rate for those over fifty-five has remained constant since leveling off in early 2014. While the labor market is tight as seen by rising incomes, there is a serious problem of discouraged workers in our economy. The civilian labor force participation rate has not gone above and stayed above sixty-three percent for more than one month since it fell below in September of 2013.

I would argue this problem is closely related to our economic growth problem– as I mentioned above, less labor leads to a slower growth rate, but a weak and stagnant economy also does not need as many workers. Building on the labor participation problem is the upcoming wave of automation. In the next decade or two, tens of millions of jobs will be lost to automation– either directly or those that support the jobs. No bigger threat exists than in the trucking industry. As automated trucks enter the industry, over three million trucker jobs will be lost, and another five million jobs which support truckers will be threatened. In over half of the states, truck driving is the most common job.

To borrow language from the economist Tyler Cowen, complacency is another threat, especially in areas ruined by automation and free trade. While we cannot subsidize small parts of the population by forcing the rest of America to sacrifice their standard of living, this is still a problem that needs to be addressed. Take Youngstown, Ohio– a place which Obama won by over six points twice, but where Hillary Clinton only won by two points. Since April of 2016, it has held an unemployment rate of about seven point four percent, which is three points higher than the national average. If Youngstown, Ohio was a state is would have the highest unemployment rate by a whole percentage point. Former homes of industry like Youngstown, have been left decimated by free trade and automation, and have fallen into a state of complacency where they are waiting for an opportunity to come to them. In truth, opportunity has left the steel factories– that is why the population has been halved since the 1970s. America is currently at risk of creating a complacent and permanent underclass in these places.

In closing, let me offer one broad solution– a return to the basics of a free market. Voluntary exchange, flexible prices, private property, stable money, and stable institutions. These are the keys to a successful economy, but in each one, we are moving further and further away from. More and more, a government bureaucrat is butting in between a voluntary exchange of two parties. Prices, particularly low-level labor prices, are becoming more and more controlled, as cities and states push higher minimum wages, creating unemployment, opportunity gaps, and their own permanent underclasses. Private property, especially since Kelo, has been under assault. Take the Environmental Protection Agencies Standing Water Rule, which gave them the right to regulate property with ditches and puddles of water. This was, in effect, a taking of private property. Stable money is perhaps the best thing we have going for us. Although monetary policy is arbitrarily decided by the Federal Reserve, the consumer price index has been remarkably stable since the 1980s at around two point five percent. Lastly, our institutions have become less stable. Take the last election, the entire basis of it was to destroy Washington DC. We had two major candidates- Donald Trump and Bernie Sanders- promising to overturn the status quo.

We should not get complacent with the rosy big picture. Yes, it is fantastic, but our fortunes can change. America is not endowed with its riches by a higher power, but because it was built upon the greatest economic system known to man– free market capitalism. As we move further and further away from that, we not only increase the risk of stagnation but the risk of moving backward.


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