Saturday, April 29, 2017

What Drives Economic Growth

     The primary driver of the American economy is consumer spending.  Historically, the people of the U.S. have worked hard, earned wages, and spent money.  Now as in the past, Americans spend for housing and energy, furniture and appliances, food and beverages, clothes, personal hygiene and health care, transportation, recreation and entertainment, education, etc.  Ever since the 1600s, whenever consumer spending increases, the national economy grows, and vice versa.
     We think of the American economy as a free market, with individuals and businesses offering their services and products while consumers freely pick what they do and do not want.  As long as consumers have choices, they can make or break businesses.  
     In 1932, at the peak of the Great Depression, consumer spending accounted for 83% of the GDP in the U.S.  It hit a low of 49.5% in 1944 during the Second World War.  From 1946 to 1980, consumer spending averaged 63% of the GDP.  It rose to 67% in 1981-2011 and over 70% since 2003.  
     In 2016, the American GDP was about $18.5 trillion in current dollars.  Of this amount, 70%-71% was consumer spending, 11%-12% was business investment, and roughly 20% was government spending.  Net imports may have been -4%, as the U.S. imports more than it exports, with the net coming off the GDP.
     Historically neither business investments nor government spending has sustained economic growth as strongly as consumer spending.  Yet, some pro-business economists and politicians have argued that the Federal government could stimulate further economic growth by giving benefits and incentives for businesses to invest more, as if the principal driver of business investments were government policies and taxes rather than consumer spending. 
     Since the presidency of George Washington, Federal government spending, barrowing, and taxing have impacted the people and national economics.  It has always been a matter of how the government benefits some interests more than others.
     You can lower Federal taxes on businesses, from small enterprises to large corporations, but they may use the extra cash to buy back their stock, give executives bonuses, buy out competitors, or just hold on to it, as corporations have since 2008 held an unusually large amount of cash (perhaps $2 trillion).  Or they can invest in further process improvements, meaning more automation, which will require still fewer employees.  Where is the assurance that if businesses had more cash because they paid less taxes that they would necessarily invest more money in new product and service offerings that consumers will want, hire more workers and pay higher wages in the face of consumer apathy, and pass the savings of process improvements on to consumers with lower prices? 



© 2017 Stephen M. Millett (All rights reserved)                             


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