Flaws in the U.S. Economy

by: Mark Olivieri

The Falling U.S. Economy

It scares us to see what is going on behind the scenes. The economy is strong: the unemployment rate is near an all time low, and corporations are making huge profits. "This must mean that the economy is expanding" - or so most people think. But from the perspective of an economist, these are the signs which indicate a slowing, recession-bound economy.

Ironic Indications

If you look at the chart below, you will see that corporate profits are on an upward trend. However, by itself, this means nothing.

GDP, as shown below, can be thought of as the size of the economy - all goods, services, and government expenditures. Naturally, if corporate profits are rising, it is not ironic that we see a rising GDP. This is good as well.

Here is where the problem starts. Disposable Income within the U.S. is decreasing. If the economy were in a healthy state, all would be reaping the benefits. This is not the case. Because the amount of wealth that each individual is collecting is dwindling, the amount they can spend will also dwindle. However, big business is collecting larger profits. The Marxist political economist will explain this as labor wages decreasing because of rising tensions and conflicting relationships between the capitalists and the ruling class.

Another issue we are currently facing is the falling money stock in savings accounts. This can be because of the falling personal income that can be allocated to savings. But let's look at it in the perspective of an economist: If the economy is undergoing inflation (which we are), the Fed will normally raise interest rates to stimulate more savings and less spending. Also, with the housing market at a low, you would suspect these rates would be lowered to stimulate more housing purchases by lower mortgage rates.

So now we have more conflicting views - rates should by higher to cut inflation and stimulate savings growth for investments, but they should also be lower to fix the housing problem.

If the money stock in savings accounts has been falling and interest rates are currently high (thus, bond prices are rising) then why is savings falling?

This is the question of the ages and perhaps the reason why we should begin to worry. The majority of U.S. citizens are in the working class. If they are not reaping the profits that the corporations are, if their personal disposable income has been falling, and if the amount they invest (savings) has been falling, eventually corporate profits will decrease since investment will be lower. These corporations will raise prices to gain profits which will create more inflation. But the majority of U.S. citizens wouldn't be able to afford these prices. This is where the recession comes in...

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