The most important issue in this year’s election is the economy.
Unfortunately, this topic has now been “politicized,” which means that you can’t talk about it without being instantly cheered or jeered by fans of each respective political team.
But the economy is much more important than this year’s election or either political team.
And both teams are responsible for the mess we’re in–and so, I am sorry to say, are the rest of us.
And fixing that mess is going to take decades, regardless of who’s in power.
But we have to fix it. Or we’re going to become a nation of a few million landed aristocrats and 300 million serfs.
The first step is getting past the political blame-game and understanding what’s wrong.
We've had an amazingly prosperous run for the last 70 years. But we just had a big, unusual hiccup in economic growth.
What's wrong is that the amazing profits of our businesses aren't flowing through to most Americans. Except at the very top.
Now, there are many reasons for this, some of which are outside the control of our (lousy) government. Globalization, for example. It's cheaper to make stuff elsewhere, so companies have shipped jobs offshore. But that's not the only problem...
And not just in absolute dollars. Our debt has soared from less than 100% to GDP 30 years ago to more than 350% of GDP.
Put differently, the growth of our borrowing (red line) has wildly outpaced the growth of our economy (blue line).
In fact, here's what the last half-century of GDP looks like when you subtract the amount we've borrowed from the amount we've made. (Yes, that's a very big negative number).
Here it is on a year by year basis. This chart shows the change in GDP each year minus the change in debt each year.
Anyone can spend when you give them a credit card. So our frantic borrowing over the past 30 years means that our economic growth has been something of a mirage.
There are three big groups in our economy: Household, Corporations, and the Government. Households borrowed until they had debt coming out of their ears.
Put it all together and--again--our debt has exploded relative to the size of our economy. We have to reverse that.
So, how can we fix our economy? The same way we do anything hard. With sustained discipline and effort and a smart long-term plan.
Consumers need to borrow and spend less and save more. The good news is they've already started doing that.
Companies need to start sharing more of their revenue with their employees. Wages as a per cent of the economy simply have to go up.
And then, lastly, of course, we have to implement a plan to eventually get our massive government deficit under control. For reasons I'll explain, we don't want to do this immediately, in one fell swoop. But we need a long term plan.
Everyone hates the government these days. All those lazy, faceless bureaucrats. Taking our money. Wasting it. Racking up huge debts we can't afford to pay.
The common wisdom is that the government has gotten absolutely massive. That there are just bazillions of those horrible lazy bureaucrats now living off our hard work (and getting humongous pensions).
And, yes, there are a lot of government employees. But don't forget that our population keeps growing.
As a per cent of total employed people in our economy, the number of government workers is actually far lower than it used to be. About 16% of us now work for the government.
And there are about the same number of state and local employees as a per cent of total US employees as there have been for the last 40 years.
And state and local governments have actually been balancing their books. (Red = spending, Blue = tax revenue). So that's not where the problem is.
Believe it or not, no! The number of Federal government employees has stayed steady for nearly half a century.
And as a per cent of total employed Americans, Federal government workers have been dropping steadily and are now near an all-time low!
So, then, what's the problem? Why has the federal government developed such a huge budget deficit in recent years? (Red = spending, blue = tax revenue)
The good news is... the solution is obvious. We have to raise taxes as a per cent of GDP (blue) and/or cut spending as a per cent of GDP (red). And given that there are 320 million of us who have to agree, we should probably compromise: A little of both.
But, before we go jacking up taxes and cutting spending willy-nilly, we need to understand that there are two kinds of government spending...
The first kind is what we normally think of as government spending: defence, highways, bridges, NASA, government employee salaries, etc.
Right--social programs (blue). By a lot. Importantly, though, this has only happened in the past 20 years.
Social program spending (red) has grown so much, in fact, that it now consumes almost all federal tax revenue (blue).
Meanwhile, the OTHER kind of government spending--highways, military, federal salaries, etc.--has actually been shrinking as a per cent of the economy.
Even Military spending--the other big federal expenditure behind Social Security and Medicare/Medicaid--has been shrinking as a per cent of the economy.
So, do we have to get Healthcare and Social Security spending under control? You'd better believe we do. If we don't, we're toast.
But! Before you go vote for candidates who are just going to whack Social Security and Medicare/Medicaid spending, remember this...
So we need to fix our social programs gradually, calmly--not in a fit of panic that will throw us into a Depression.
It took us 30 years to get into this mess. (Debt = red, GDP = blue). It will probably take us 30 years to get out.
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