Here's What's Wrong With The Economy [CHARTS]

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Photo: Wikipedia

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 cheered or jeered by fans of each 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.

The sad truth is that 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 aristocrats and 300 million serfs.

The first step is to get past the political blame-game and understand 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.

So, what's wrong?


Our businesses are doing remarkably well. The profits of the S&P 500 just hit an all-time high.

Big companies are making more profit per dollar of sales than they ever have before.

What's wrong is that the amazing profits of our businesses aren't flowing through to most Americans. Except at the very top.

The percentage of Americans with jobs is at the lowest level in three decades.

And wages as a per cent of the economy have hit an all-time low.

Now, there are many reasons for this, some of which are outside the control of our (lousy) government.

One big problem is debt. Total debt across our economy has skyrocketed in the past 30 years.

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).

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.

Households borrowed like crazy.

So did corporations.

And here's Federal government debt -- $16 trillion and counting.

Put it all together and--again--our debt has exploded relative to the size of our economy. We have to reverse that.

The next big problem is growing inequality. The top 1% of the country is getting ever-richer, while everyone else treads water or loses ground.

The problem started in the early 1980s. Before then, increasing American prosperity was shared by everyone.

Since the early 1980s, however, the richest Americans (pink) have captured most of the gains.

And this problem has gotten especially bad in the past 10 years.

Why has inequality gotten so extreme?

This, plus the decline of labour unions, put pressure on wages. Average hourly earnings (adjusting for inflation) haven't changed much in 50 years.

Meanwhile, taxes have been cut sharply for investors, owners, and high wage earners.

This has led to an explosion in the pay of CEOs and other senior execs and investors relative to average workers.

The richest 20% of the country has gained. Everyone else has lost.

The other problem with inequality is that it leads to social unrest. Eventually, people get tired of feeling screwed, and they decide to do something about it.

For the last 30 years, we've muted our growing inequality with increasing government spending on social programs--Social Security, Medicare/Medicaid, unemployment benefits, and so forth.

Over the past 50 years, social-program spending has exploded as a percentage of the economy.

In fact, social program spending (red) has grown so much that it now consumes almost all federal tax revenue (blue).

Meanwhile, we have cut spending (as a per cent of the economy) on other things the government pays for--such as highways, military, federal salaries, etc.

But the combination of explosive social-program spending (most of the red line), plus reduced taxes (blue), has created a massive budget deficit. We need to develop a plan to fix that.

So, what's wrong with the economy? Well, for one thing, consumers and the government lost spending discipline. And it's not going to be easy to fix that.

We will need sustained discipline and effort and a smart long-term plan.

Specifically, consumers need to spend less, save more. and pay down their debts. The good news is they've already started doing that. The savings rate is trending up...

And household debt is trending down.

Profits are at an all-time high, wages at an all-time low. Wages 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. We don't want to do this immediately, in one fell swoop, because lots of Americans (and the economy) have become highly dependent on that government spending. But we do need a long term plan.

And, yes, we have to get Healthcare and Social Security spending under control.

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.

So go elect someone who can fix it.

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