This page covers four topics:
As mentioned in the basic economics write-up, production depends on increases in:
- Natural resources
- Capital (machinery and loans to get the machinery that turn the natural resources into products with the help of people’s labor.)
If production depends on these three, then economic growth depends on increases of the quantity or quality of these three. For instance, if we find are a paper company and we plant more forests and get more trees, we can increase production of paper once we also increase our workforce and machinery.
Technology is the “magic” factor that can increase the quantity or quality of all three factors. For instance, better ocean drilling technology allows oil companies to reach new oil fields. Better educational techniques (another kind of technology) can increase the quality and efficiency of the workforce. New technologies that create new products or more efficient machines increase the capital. And different financial instruments or regulations can sometimes increase the financial capital as well.
Other things besides technology can impact growth. For instance, changes in immigration policy can increase the number of workers in a country that can do productive work. That’s good for industry, but makes it harder on workers already in the country because there’s more competition for jobs when the economy is not expanding.
Why is economic growth so important and problematic?
For any country, if the economy contracts or even if other parts of the world grow much faster, then money leaves the country. That leads to fewer jobs in that country. Less people working mean less tax money. Less tax money leads to poorer infrastructure and also fewer government jobs which lead to more unemployment which leads to even less tax money coming in. This leads to a downward economic spiral for a country.
Is economic growth all-good? (No…)
Economic growth is usually seen as good, because if it grows faster than the population, people are wealthier on average and goods are cheaper. But economic growth can cause the following problems:
- Increased consumption of natural resources, and increased competition for what’s left.
- Increased pollution (land, water, air, and noise pollution)
- People losing their jobs because new technologies automate the jobs or make certain products obsolete.
- People losing jobs in some countries because they lag behind other countries in economic growth.
- Increased stress on some people who don’t have the ability to keep up with new technologies or learn more complex jobs. Increased stress on people because there are many more “channels” of information, and many more messages per channel. Increased stress, also because when legal and economic barriers to production are lowered, competition becomes global and it intensifies. This often leads to one big winner in each market (Ebay, Paypal, Amazon, Google, etc.) and everyone else struggling much harder to keep up.)
- Increased concentration of wealth in the hands of a few …because the advanced technologies require large investments, and because of the limited monopolies granted to the holders of the intellectual property, the patents on the specialized technologies.
How can the problems caused by economic growth be addressed?
Everyone depends on the health of the environment and the health of the economy, so we can call them both “life-support systems.” However, there is one huge difference between the two systems. The environment runs on the laws of physics, chemistry and biology, and these laws don’t change. But the economy runs partly on some laws but also to a great extent on rules that people make – and so can change!
Governments have the power to change the rules—but increasingly they have been hindered by the improper “contamination” of the political process by businesses that want all the rules and laws made to serve their desire for short-term profits. Thus, Proof Through the Night and similar organizations aiming to increase the power of citizens to regain control of their government are parts of a solution.
Unlike material goods that use up resources, energy, and often produce pollution and solid waste, services that people offer each other produce none of these side effects, or very little. For instance, counselors help people and make money at it, but they produce no pollution and use much less energy, relative to a factory. People who produce art, literature or music, are another example.
The Federal Deficit and National Debt
The federal deficit is the amount of debt that the federal government creates in a year if it spends more money than it brings in. Each year’s deficit (when there is one) is added to the national debt, which is the total debt of the federal government.
Many people tend to become anxious when they learn that the national debt is about 12 trillion dollars (2013), not counting intergovernmental debt which would make it 16 trillion. Others become anxious when they learn that, historically, nations often when lose their good credit rating when the ratio of debt to national income (GDP) is over 90%, and when they learn that the US debt to GDP is close to 100%. (In other words, 16 trillion divided by 16 trillion.) Others become anxious if they believe that China or another nation can “call in our debt” leading to an (imagined) tightening of the money supply, leading to a drop in economic growth. Finally, people become upset when the hear about the overspending of government because they think of it as if the government is like a person who is undisciplined, and we’ll see that it’s not exactly the same situation.
In any case, there are several reasons not to become anxious or terrified – although people should still be aware and concerned. First, much of the government debt is owed to different parts of itself. Social security money has been loaned to other parts of the government. Second, the US government holds some debt of China and other countries, and economically “we’re all in this together.” China exports a tremendous amount to the US and many countries are trading partners as well. So any “attack” on one country just would come right back at the attacker. Third, the U.S. dollar has extra protection since it’s the reserve currency of the world. Half of the dollars in circulation are moving around outside the country. This is another reason countries would not want to sink the dollar, and “rock the boat.”
The other reason that deficit spending is not always bad is that it’s a way to stimulate the economy when there are economic slowdowns or crises. Most experts, credit the economic stimulus of 2009-2010 with preventing great economic hardship worldwide. So comparing the US government to a wage-earner who keeps running up debt is not a perfect analogy at all.
On the other hand, there is something to be said for what the government spends on. Compare it to a business. Businesses frequently take on loans (run up debt) in order to buy capital that helps them produce more later. Then later they can pay off the debt and the interest, and still have more profit than they would have. But if a business had just run up debt to give its employees more money, it would not be wise. It would lead to no increased ability to pay back the debt and interest on the debt. In the same way, it’s important as voters to encourage leaders to spend government money on programs that will lead to economic growth so that relatively more debt can be paid down in the future.
Of course, the other way for the government to reduce the deficit is to increase taxes and cut spending. But besides creating many unhappy tax-payers, this would take more money out of circulation, leading to higher interest rates, leading to lower investments by businesses, leading to a slowdown or reversal of economic growth. That can lead to the downward economic spiral described in the Economic Growth section above.
What is inflation?
Inflation is a rise in the economy’s average price level. In other words, it’s an increase of the prices of goods and services in a country. It’s measured by the Consumer Price Index, the CPI. The CPI figures are published monthly, but the inflation rate is usually an annual figure. For instance if the monthly CPI stayed at 05% for twelve months, the inflation rate would be 12 times that or 6%. In other words, you’d expect an apple that cost $1.00 at the beginning of the year to cost $1.06 if the CPI stayed constant all year.
Why does inflation happen?
Our average, price level tends to rise when the government and banks puts more money in circulation. But if governments and banks put too little money in circulation then economic growth slows or stops, and that leads to the problems mentioned above.
What’s wrong with a little inflation?
A little inflation is only a minor annoyance, but at rates nearing 10% many bad things happen.
- People with fixed incomes suffer. The things they want or need cost more and more.
- High inflation leads to lower production. If things cost more, people buy less of things that are not essential.
- High inflation causes uneven employment and uneven wealth creation. When people have less money they spend more on the essentials, such as food and housing, and spend relatively less on non-essentials. So for instance, people in food production industries do alright, but some people in non-essential industries such as luxury cars lose their jobs, or get less income.
The Social Security System and several other social programs were created during the Great Depression of the 1930s. These programs were designed to provide a source of income for the elderly, the disabled, and their dependents.
The social security system gets its money from taxes collected on wage and salary income—not all income. Employees pay about seven percent of any wages up to $50,000 into the social security program (This usually comes from withheld FICA taxes). Employers pay an equal amount. Anyone who pays into the system for about ten years is eligible for benefits once they become old enough.
The social security system pays out to people who are elderly and retired, disabled, or a dependent of someone who is disabled (like an orphaned child). The amount paid, depends on several factors. In the case of people elderly and disabled, it’s based on an average of your salary for all the years you worked. So the social security system is not a pension or retirement system. It’s meant to be something like a safety net so that people who cannot work don’t face great hardship. However, the safety net is far from perfect.
One of the greatest imperfections is what makes Social Security a political issue: The system only works if the number of people paying into the system is greater than or close to the number of people getting payments. The much-anticipated problem is the large number of baby boomers hitting retirement age, relative to the current and expected pool of active workers. This is why the Congressional Budget Office expects the system to be bankrupt by about 2037.
What are potential solutions?
One solution is to keep moving the retirement age up, to 70 and beyond, so that relatively more people are paying in and less are taking payments. This would not welcomed by many workers, and yet with advances in medical knowledge and how to keep up your health, on average this is not a bad idea.
A second solution is not a good one. It’s just to reduce benefits. Because inflation happens in most years, this would be an especially unwelcome approach.
Another solution is to increase immigration to increase the number of workers. Of course, economic growth must also take place, otherwise wages go down, and there are just more unemployed people.
Another solution is to more actively invest social security income into a wide range of technologies that are likely to produce high returns. While some investments will fail, having multiple investments would greatly increase the likelihood of high average returns.
Currently there is no consensus on the best package of solutions. So the problem remains a major long-term concern for the country.