There has been a lot in the news lately about how great the U.S. economy is these days. Federal Reserve Chairman Jerome Powell stated recently that the “economy is doing very well”. As I learned it in college the function of any economy is to do the most good for the most people. What’s not so clear in the current economy is who is benefitting the most, who has been left out, and why.
The president’s positive impact on the economy has been very limited: The economy has been strong and growing for a long time prior to Trump’s presidency. Since the financial crisis in 2008 the economy has steadily improved year on year. Ultra low interest rates, fiscal deficit financing, and global trade have all helped enormously to retrieve the U.S. economy from the greatest recession since 1933. However, in the last 1 ½ years that Trump has been in office interest rates have risen to protect against growing inflation and fiscal deficit policy has been limited to tax cuts benefiting only large corporations and rich corporate managers. Additionally, global trade is under assault by the Trump Administration’s tariffs.
The continued fiscal deficits are unsustainable: Fiscal deficits (government borrowing money for operations) are not limited to either political party—both parties have contributed. The Democrats apply more spending than there is tax revenue, and the Republicans cut taxes which reduces revenue. Both parties take these actions for political purposes and not entirely for the benefit of the entire economy. The argument that deficit spending is useful during a recession is plausible and has some historical support. However, in the long run most economists agree that the magnitude and duration of the accumulated fiscal deficits is not sustainable, and the concept that economic growth will swallow the deficits up is fantasy. The only method of reducing any deficit is to spend less money than the revenue that is taken in. This can be said for corporations, households, and individuals, as well as government.
The distribution of wealth is lopsided towards the top percentile: The top 10 percent of the country controls about 73 percent of the wealth. The top one percent holds about 39 percent of the wealth. These statistics have been creeping up steadily since 1986, when the Ronald Reagan Administration first brought out the idea that tax cuts for the rich would lead to greater economic growth that would bring in more tax revenues. The middle class (about 40 percent of the overall population) since 1986 has seen a retraction from about 36 percent of the wealth down to about 27 percent. The bottom 40 percent has a negative net worth and very little cushion in the event of emergency.
The impact of a college education in this day and age: College education is more important now for job seekers than ever before. Of the approximately 2.6 million new jobs created in the last year about 70 percent were filled by college graduates. This is up from about 30 percent in May of 2000, when unemployment figures were comparable. The difficulty with this equation is that only about 30 percent of the entire population over age 25 has a college degree. A fact that raises the stakes is the massive increase in college debt over the last 14 years – up to 540 percent! According to the College Board about 60% of college graduates from 2016 forward held an average of about $28,400 in college debts. This huge debt amount born by individuals can take years to pay off postponing other purchases such as a house for up to seven years for millennials. It can also lead to major credit card balances being born by the graduate even further depressing discretionary spending.
The rising cost of affordable housing: The demand for single family dwellings has risen considerably in recent months owing to the strong job market and a very short supply of available properties. The real estate brokerage Redfin says the median sales price has jumped 6.3 percent over the past year to $305,600. A general rule of thumb is that buyers can afford a home worth roughly three times their income. Therefore, the median home sales price is nearly double what a typical U.S. household earning a median annual income of about $57,000 can manage. Additionally, 30-year fixed-rate mortgages are growing costlier. The average interest rate on these mortgages has jumped to 4.62 percent — from 3.95 percent at the start of the year — according to mortgage buyer Freddie Mac. The Federal Reserve is in a tightening posture which will likely force interest rates up to the 6-7 percent levels in the near future.
Summary: The great rise in the economy has been going on for over 9 years and is reaching the latter stages of the cycle. Fiscal deficits are not sustainable over the longer term. A college education, ever more important, is also ever more expensive and can leave college graduates deep in debt before they enter the work force. Housing is likewise moving out of the grasp of median income households. However, the top 10 percent of the economy control about 73% of the wealth, so if you are in the top 10%, then the economy is certainly very good.
SOURCES: Charles Schwab, Associated Press