The Economy is Booming, But There’s Trouble on the Horizon

America’s economy is doing well, but there are some long-term problems which aren’t going away soon.

By Samuel Gregg Published on October 26, 2018

By any standard, the U.S. economy is booming. In the second quarter of 2018, America’s annualized GDP rate hit 4.2 percent. Unemployment fell to 3.7 percent. It doesn’t get much better than that.

Among the people flourishing are groups that have endured higher-than-average unemployment. The unemployment rate among black Americans, for instance, is 6 percent. That’s down from 8.3 percent just two years ago.

There are many reasons for this uptick in prosperity. One is the personal and corporate tax cuts passed by Congress in late 2017. They have made America more attractive for foreign investors and shifted more capital back to the private sector — which, as a rule, is much better at creating wealth than governments. Another driver of growth has been the Trump Administration’s drive to deregulate the economy.

The effect of these and other policy-shifts has been to make the U.S. economy more competitive vis-à-vis the rest of the world. When you free up your markets, that tends to happen.

Overshadowing this good news, however, are some dark economic clouds. These problems aren’t hard to identify. In many ways, the real challenge is the lack of political will to address them.

The Debt Still Matters

Between January 2016 and October 2018, America’s total public debt increased from $18.922 trillion to $21.682 trillion. That adds up to an expected public-debt-to-GDP ratio of 108 percent by the end of 2018. That’s not good news because there’s evidence that once a country’s GDP-to-debt ratio exceeds 90 percent, it starts hindering growth over the long term, cutting potential growth by as much as half.

But, some might say, if growth keeps ticking along at its present pace, surely it will reduce that GDP-debt ratio to less-worrisome levels. Can’t America grow itself out of the problem?

Reversing our trajectory will require legislators who are willing to make decisions which will make some people unhappy.

There’s much truth to that claim. It assumes, though, that the U.S. can continue its impressive growth-rate. We all hope it does. Unfortunately, no-one can guarantee this. In fact, postwar America’s economic history shows enormous fluctuations in real GDP growth rates. More worryingly, the overall trend is downwards.

Reversing that trajectory will require legislators who are willing to spend political capital by doing what will make some people unhappy. That’s particularly true when it comes to the welfare state.

Our Entitlement Albatross

Right now, Medicaid and Medicare, Social Security, Obamacare, and unemployment insurance, when taken together, amount to about 70 percent of Federal spending. Worse, these entitlement programs are fixed parts of the Federal Budget. Entitlement increases are by law “baked into” the budget-making process. Much of that growth is in healthcare spending as America’s population ages and lives longer.

Put another way, when Congress and the White House go through the annual budget process, they can make real decisions about only 30 percent of the budget. And that percentage is steadily being reduced by relentless growth in entitlement spending.

Further reason for concern is that neither major party has strong political incentive to pursue the entitlement reform America needs. Such as what we witnessed in 1996, when a Democratic President and a Republican Speaker negotiated the Personal Responsibility and Work Opportunity Reconciliation Act.

Republicans have signaled that they can’t — or, rather, won’t — move forward in this area without some Democratic backing. They’ve calculated that, absent such support, fiscally-reforming Republicans will find themselves portrayed as evil-doers who hate the poor.

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Some Democratic legislators see America’s entitlement troubles. They know, however, that their political base has shifted far to the left over the past three years. It’s actually calling for increased entitlement spending. More-fiscally conservative Democratic legislators are nervous about losing primaries to people like New York’s Alexandria Ocasio-Cortez. She advocates policies like a federal jobs guarantee and universal health care.

For the moment, the economic costs of entitlement-spending are somewhat absorbed by the economy’s improved growth-rate. But as soon as that growth stumbles, that financial burden will grow exponentially.

Leaving aside the economic costs, America’s on-growing entitlements problem just isn’t healthy for us as a society. It’s one thing to have a safety-net. It’s quite another for the state to assume more and more responsibility for helping those who really do endure material poverty.

In the latter scenario, more and more people start assuming that the government — rather than families, religious associations, etc. — has the primary responsibility to address such problems. This can change the way a society approaches how and why we assist the least among us, and not for the better.

The top-down one-size-fits-all character of many welfare programs, for example, can’t help but miss many of the often non-economic reasons why some individuals fall into poverty. Non-state charities, which tend to be closer to the reality of people’s lives, are much better at detecting some of these factors, ranging from substance-abuse to mental illness.

Then There’s the Rest of the World

A third cloud on America’s economic horizon is one that the United States can’t do too much about. But it bears mentioning. While the U.S. economy is performing well, many other of the world’s other economies are not.

Let’s consider China. For almost two decades, it’s been a major driver of economic growth across the globe. That started slowing down two years ago. This is partly because of China’s protectionist policies, which are starting to breed major inefficiencies. And it doesn’t help that over the past 10 years, China has been losing its greatest competitive advantage (which it has had for the past forty years): cheap labor.

Compounding this is what’s referred to as China’s debt bomb. One commentator recently noted, “Chinese borrowing rose 14 percent in 2017, ballooning to 266 percent of gross domestic product, from 162 percent in 2008.” Those numbers are something for all of us to worry about.

A failure by China to master its present economic challenges will have major flow-over effects on all the world’s major economies.

Even more basically, China remains desperately weak in two areas crucial for economic growth: secure private property rights and rule of law. Addressing those issues, however, would require wholesale rethinking of the very nature of China’s authoritarian regime. There’s no sign that China’s government or ruling Communist party has any interest in doing so.

Why should Americans care about this? Because the effects of a slowdown in China’s economy can’t be confined to China.

The sheer size of China’s economy means its problems would affect the rest of us. In 2008, no country could immunize itself from America’s financial crisis. In the same way, a failure by China to master its present economic challenges will have major spill-over effects upon all the world’s major economies, including America’s.

Don’t Forget the Long-Term

None of this is meant to deny that there’s much to celebrate about America’s economy today. To repeat: growth is indeed great and unemployment is down. We’re light-years away from the 2008 Great Recession and the eight years that followed. Talk of a “new normal” of downgraded expectations of the U.S. economy has vanished.

Long-term economic challenges like the ones outlined above are, however, always the hardest to tackle. But that’s precisely why we must highlight these issues and encourage policy-makers of all parties to have the courage to address them in times of prosperity.

Forewarned is, after all, forearmed.


Samuel Gregg is Research Director at the Acton Institute and author of For God and Profit: How Banking and Finance Can Serve the Common Good (2016).

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