The Future of the Economy

The Great Recession officially ended in June of 2009, but the lethargic employment growth over the past two years contrasts sharply with the rapid employment growth that usually follows a recession. Most economists expected a quick return to normalcy and are stymied by this “jobless recovery.” With persistently high unemployment threatening his reelection chances, President Obama is advocating a jobs proposal as another attempt at economic stimulus that seeks to save at least one job. Assuming the president can overcome resistance by congressional Republicans, the question remains whether this stimulus can not only keep the economy afloat, but actually get it growing again.

The major provisions of the president’s jobs proposal are tax cuts and investment in schools and infrastructure. President Obama is proposing a payroll tax holiday for employees and wants to reduce the taxes on the first $5 million of employers’ payrolls by 50%. Another component of the proposal is an extension of the corporate tax deduction of 100% of investment in new plants and equipment. These tax cuts would total $240 billion. While similar tax cuts have received bipartisan support in the past, the economic benefit is questionable and Republicans are hesitant to support the measure. Lawrence Mishel of the Economic Policy Institute states that the “payroll tax holiday for employers on the first $5 million of payroll is not all that effective.” Paul Krugman, a Nobel Laureate in Economics and Professor at Princeton University, asserts that “it’s unclear, in particular, how effective the tax cuts would be at boosting spending.” Republicans cite the temporary nature of the tax cuts as a concern. This is based on one of the prevailing economic theories, which assumes that rational workers will respond by saving the entire amount of the tax cut since they expect higher future taxes.

The problem with tax cuts as a form of stimulus is that they are only effective if they provide an incentive for businesses to hire and workers to spend. Businesses are reluctant to hire because they do not think it will be profitable to expand given the lethargic market, and workers are reluctant to spend because they are worried about their job security. Tax cuts are unlikely to have a significant impact on these attitudes. Meanwhile, with the constant concern over the solvency of Social Security and Medicare, it is unwise to reduce the payroll taxes on which these programs depend.

The second leg of President Obama’s proposal is investment in schools and infrastructure. This includes $30 billion to prevent teacher layoffs, $30 billion to modernize public schools, $15 billion to renovate old homes and businesses, and $10 billion to improve transportation infrastructure. In total, the president is proposing $200 billion in spending. Investment in infrastructure and teachers is needed, but this spending will only create jobs in the short term. Even this short term impact is not promising. Krugman points out that the $440 billion in proposed spending and tax cuts “may sound like a lot, but it actually isn’t. The lingering effects of the housing bust and the overhang of household debt from the bubble years are creating a roughly $1 trillion per year hole in the US economy, and this plan . . . would fill only part of that hole.”

If the problem with the economy is a $1 trillion dollar hole, then the obvious solution is to increase the size of the jobs proposal to $1 trillion dollars and to pass a new jobs proposal every year until the economy is growing at its typical rate. Of course, this is not a sustainable solution in the long run. The economy will recover of its own accord, but it will take time. The hole is the result of massive amounts of debt accumulated by consumers since the 1980s. Housing prices have fallen by an average of almost 35% during the recession, leaving consumers with significantly negative equity, and high credit card debt also plagues many consumers. Consumers are in the process of digging themselves out of debt and until this happens, aggregate demand will be low and economic growth will be slow. Contrary to what commercials on television say, there is no shortcut to getting out of debt.

While President Obama’s jobs package may not jumpstart the sluggish economy, the future of the US economy is bright. Our GDP of over $14 trillion is more than twice the GDP of any other nation and is almost as large as the combined GDP of the entire European Union. China will eventually pass the US in GDP, but that should be expected given that China’s population is over four times as large. China’s growth is good for the US economy because a larger Chinese middle class will increase demand for US goods. The United States is the world leader in research and development of new technology. According to the Academic Ranking of World Universities, compiled by Shanghai Jiaotong University, 17 of the top 20 universities in the world, 54 of the top 100 universities in the world, and 89 of the top 200 universities in the world are in the United States. US citizens, universities, and corporations receive approximately 20% of all patents worldwide, which is second only to Japan.

Economists may debate over the causes of and solutions to recessions, but there is a near unanimous agreement that productivity is the key determinant of long run standards of living. Productivity has grown throughout the recession, so when employment eventually returns to normal levels, the economy will see tremendous growth. The US will continue to see impressive productivity growth for the foreseeable future because of rapid technological innovation and increases in efficiency resulting from international trade. Our nation’s most prosperous days are still ahead of us.

Illustration by Kelsey Brod

To Close the Income Gap, We Must First Close the Education Gap

US economic growth depends upon technological innovation to drive productivity increases. Consumers benefit by getting more goods and better goods for their money, which increases standards of living. Workers also benefit from technology, but the benefits are often asymmetric. The growing gap between the rich and the poor and between the college educated and those without a college education reflects the fact that we live in a knowledge economy. Technology has made it possible to automate processes and reduce redundancies, which has cost many people their jobs. In the short term this seems problematic, but it frees up human capital to be put to work on new problems. We don’t think of the large decrease in farmers in the past two hundred years as a cause of unemployment, but as a revolution that enabled people to pursue more specialized roles which drove the economy forward.

Our knowledge economy provides opportunities for well educated workers who can solve complex problems that cannot be automated. According to the Brookings Institution, 88% of 23-24 year olds with a college degree are employed as opposed to 64 percent of 23-24 years olds with only a high school diploma. In this age group, the average weekly income of college graduates is $581 as opposed to $305 for high school graduates.

The key to improving people’s economic situation is increasing educational attainment. Only 28% of Americans are college graduates. The US ranks 20th among all nations in the proportion of young adults with a degree in science, technology, engineering, or math, and US high school students ranked 28th in math and 24th in science according to a congressional report. College graduates will continue to have vastly superior employment prospects and substantially larger incomes. If we want to close the income gap and strengthen the middle class, then we have to improve the education system.

1 Comment

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H. T. Lippmanreply
15 November 2011 at 11:49 AM

If I was a business, I wouldn’t hire anybody until Congress stops getting us into debt. Why would I try to make money when they’re just going to take it to pay welfare? This is why liberals shouldn’t be allowed in government

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