Explaining economic pessimism
It looks like the U.S. economy dodged a bullet.
We ended 2023 without a recession and with an unemployment rate of only 3.7%. Economists now say that a downturn is no longer an immediate concern. The rate of inflation, while not returning to its low of 1.23% in 2000, stands at 3.4%, down from 7.1% last year. While projections made in mid-2023 indicated that the economy would grow at an anemic rate of 1.8%, it actually grew by 2.1%.
With all this good news, it is understandable why some politicians are scratching their heads trying to determine why polls show Americans are apprehensive about the future of the U.S. economy.
One hypothesis for this dichotomy is that prices for most products Americans buy has not diminished, but that phenomena would have only occurred if the U.S., like China today, was experiencing deflation such as our country saw in the 1930s.
The other is that the fragility of the world order concerns Americans as they look to the future of the U.S. economy.
There may be additional reasons for a semi-melancholy economic attitude among Americans. Citizens seem increasingly worried about issues that are of concern to economists themselves.
In an insightful Wall Street Journal article, Alan Binder, a noted Princeton economist, summarized these concerns. He contends that there are three problems critical to our economic progress. Yet legislators on both sides of the aisle are unable to agree upon policies to address them.
The first is the federal budget deficit.
The Trump-era tax cuts were not matched by spending cuts. In fact, new federal spending has increased at an alarming rate. Today the country’s total federal debt amounts to $34 trillion, making it significantly larger than our gross domestic product — the value of all goods and services the United States produced last year.
And the total deficit continues to grow. Federal government spending grew from $4.45 trillion in 2019 to $5.21 trillion in 2023 — an 18% increase.
Some of this growth was the result of pandemic-related expenses, but the Congressional Budget Office, which projects baseline federal spending, estimates spending will increase at least 4.8% a year in the next 10 years.
Secondly, there is significant dysfunctionality in Washington over U.S. trade policy, resulting in a real threat to economic growth in the country and globally.
Economists know that policies that facilitate free trade among countries promote rapid economic growth.
However, bipartisan maneuvering in Washington to protect various industries during the last two administrations continues to generate higher prices for consumers while being a drag on economic growth.
Finally, key issues, such as climate change, are not being dealt with efficiently or effectively by Washington decision-makers. For instance, if the country really wants to reduce carbon emissions and mitigate climate change, then Congress should initiate a fee on carbon use.
Charging industries, agriculture and individuals for the carbon they use would be a much more efficient way to reduce CO2 and other gases from autos, factories and farms. Creating such a carbon fee or tax would work better than the variety of today’s subsidies and other contrivances that only interfere with the market, creating a variety of unanticipated consequences and having negligible impact on carbon emissions.
Among many benefits, one key outcome of a carbon use fee would be that people would drive their vehicles less in the short run and buy electric vehicles in the long run. Doesn’t this make more sense than, for instance, spending billions of dollars subsidizing a select cadre of domestic EV manufacturers?
More Americans are demonstrating a maturing attitude
More Americans are demonstrating a maturing attitude about the economy. They are looking beyond just those immediate personal bread and butter issues that impact their families.
about the economy. They are looking beyond just those immediate personal bread and butter issues that impact their families.
Instead, Democrats and Republicans in Washington continue to fight over key economic issues important to the country’s economic future, but they do little to address them. The rapidly growing federal debt, self-serving restrictions on global trade and the inability to agree upon effective and efficient ways to address carbon emissions are economic problems that, if not dealt with today, will hamper economic prosperity tomorrow.
Voters realize this. It is now up to leaders in Washington to do so as well.