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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  • Paul

    I’m surprised there’s no mention of fiat currency

    • Ardent Patriot

      I just mentioned it.

      • Paul

        What happened to your other comment?

  • Nick Stuart

    Entitlements are a great big [stuff] sandwich, and we are ALL going to have to take a bite. It can’t all be forced onto current taxpayers.
    This especially includes current recipients of Social Security. What I think would be the most painless thing to do is reduce the automatic indexing to inflation by 25% or so. Current recipients wouldn’t experience a “cut” they would experience slower growth in the amount of benefits received. No politician has the moral courage to do this of course. I’m not oblivious to the Social Security question, I’m 67, currently employed full time, and plan to continue working as long as I can to bank as much as I can against the day when I can’t. I know not everyone can do that, but more of those of us who can, should.
    Actually, the decision has already been made about what to do about Social Security fiscal insolvency. The decision has been made to do nothing until it becomes a great, red-hot, pulsating, screaming crisis. Mark it down, it will come down to “if this bill isn’t approved and signed by midnight, Social Security checks won’t go out, grandma will be shoved off a cliff into a snow bank, everyone will die, Oh the humanity!!!” Same thing with Medicare and Medicaid. Same thing with government sector pensions. Same thing on the state level as the federal level.
    Any Christian in the US who is not living at a subsistence level (which is almost all of us) needs to cut back and conserve their money and other resources against the day the bubbles start to burst.

    • Paul

      Let’s also keep an eye out for the nationalization of 401k and IRA accounts.

    • Paul

      “Current recipients wouldn’t experience a “cut” they would experience slower growth in the amount of benefits received.”

      I’m not disagreeing with your approach, but this analysis isn’t looking at the net payment as the medicare deductions outpace the SS increases. It’s the net that many recipients are using as their measure.

  • Ardent Patriot

    Great article however there is another problem as well. China Will Not Attack The Dollar Directly, But Is Surrounding It For Death Knell…

    US allies would then need to choose between the two: the collapsing dollar, with no backing to shore it up, or a Gold-backed renminbi.

    Many countries outside the US see the US approach to diplomacy as: Bluster and Intimidate.
    Whilst, typically, US diplomats wear suits and appear businesslike in their manner, their message is often considerably different. If the US states what it wants from another country and that country then chooses to decline, the response by the US is often an “in your face” approach not unlike that associated with the image of a wild-West sheriff.

    The message received from the US is often along the lines of, “We’ve decided what your role in the world should be, so get with the program or you’ll feel our boot on your neck.”

    It should be said that it makes no difference to the country on the receiving end whether it is a left boot or a right boot; whether the current US president is a democrat or republican is of no consequence. The country feels the boot equally, whichever party is in power. And the message and the objectives remain the same, regardless of which party is presently in control.

    As offensive and reprehensible as this approach is, the countries of the world often simply cave in to such behavior. They understand that if a country’s leader were to decide to, say, cease to trade in US dollars, his country might be attacked for trumped-up reasons and the leader could end up in a pine box. (This approach has been employed on more than one occasion in recent years.)
    The threat from the US is therefore very real.
    But presumably, this bullying approach would be less effective if attempted against one of the world’s more powerful countries. If, for example, the US were to find itself in a situation such as the present one with China, in which the US appeared to be losing its battle over the dollar’s power as the world’s reserve currency, what would occur? Would the US attempt to bully China? And if the ploy failed, would the US draw its six-guns and fire off a few rounds in the air for emphasis?

    And if the above were to take place, what would the Chinese reaction be? Would they retaliate in a similar manner—the diplomatic equivalent of an American baseball player butting chests with an umpire—each one childishly seeking to win through sheer bluster?

    Here, it would be useful to consider Chinese culture. Traditionally, bluster and braggadocio are not consistent with Chinese behavior. The Chinese tend to take a quieter, more thoughtful approach, one that employs patience and careful timing.

    It might be useful to consider the traditional game of Wéiqí (aka Go), a board game that was first played in China thousands of years ago and is still popular to this day.

    In Wéiqí, the objective is to place the playing pieces on the board one at a time, in an effort to surround the pieces of the opponent. (Once the pieces are surrounded, they are considered taken.) Of interest is that a common tactic is to avoid being obvious in the effort to surround the opponent’s pieces. The greater the subtlety of play, the greater the likelihood of eventual success. In essence, the philosophy is the exact opposite of the US approach. It is one of surrounding the opponent, rather than meeting him head-on.

    The game of Wéiqí is of greater significance in China than, say, Monopoly is in the US. It contains a philosophy that is basic in Chinese thinking. Although this is not a game that is likely to become popular in Las Vegas, it is one that informs Chinese diplomacy.

    Aside from the occasional comment from the Xinhua News Agency suggesting building a “de-Americanized world,” the Chinese have generally kept their cards close to their vest.

    Returning to the question of the dominant currency in the world, the US is unquestionably following its wild-West sheriff approach in demanding that the dollar remain the world’s default currency: taking military action against those who move in another direction.

    Meanwhile, the Chinese have been quietly expanding the power of the renminbi, first by encouraging its use internationally, then working out currency agreements with the BRICS, ASEAN, etc. More recently, they have created agreements with Western countries like Australia and the UK to trade in the renminbi.

    As in a game of Wéiqí, China is not attacking the dollar directly. They are surrounding it, by creating relationships first with their own close allies, then with the US allies. If they continue in this tactic, it is likely that they will complete their ability to trade with all or most of the world in the renminbi, then announce to the US that, in order to continue to buy Chinese sneakers to sell in Walmart, the renminbi must be used.

    At that point, should the US refuse, China would be in a position to say, “You’re an important customer, but if we lose you as a customer, we will still be able to maintain our present relationship with the rest of the world without you.”

    The question would then be whether the US need for Chinese goods is greater than the Chinese need to sell them those goods. There can be no doubt that both countries want the relationship to continue; however, the one who could hold out the longest would be the victor—in essence, a game of economic “chicken.”

    At such a point, the US would be likely to appeal to its allies to step in and side with them. But if the event were timed by the Chinese to coincide with massive inflation of the US dollar, the US allies would then need to choose between the two: the collapsing dollar, with no backing to shore it up, or a gold-backed renminbi.

  • rthomp8363

    It annoys me that they bundle in Social Security and Medicare, which people have been forced to pay in their whole lives and unemployment, which companies donate to with the programs like Medicaid and obamacare which cost us tax payers, one being totally funded by taxpayers and the other majority of the way being paid for by the taxpayers. Now they believe that even illegals should get part of the pie which they didnt contribute much if any to.

  • EricOfManchester

    To have some reliable source such as Dr. Gregg is a great advantage when assessing the big picture. Looking at the newly retired, widows and elderly who should be concerned about their long-term holdings, how should they adjust their portfolios? I.e., should they pay off variable rate mortgages? Should they shift 20% of their net worth to gold? I’m most concerned for middle aged widows with 5 or 6 children still at home.

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