Ten things you should know about the economy

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  • 1. Ten Things You Should Know AboutThe Economy Before You Vote InNovemberCourtesy of Forbes MagazineWritten BY:Brett Nelson
  • 2. 1. Reagan Versus Keynes• There are two broadly defined schools of thought on what makes the economy go—voters should understand the main merits and flaws of each.• “Supply-siders” (the most famous being President Ronald Reagan) believe that if you entice entrepreneurs and investors with tax breaks, they will respond by making stuff, employing people, taking risks and accelerating the economy.• “Demand-siders” (fans of economist John Maynard Keynes) believe that growth hinges on consumer demand, which can sputter from time to time. When it does, they argue, government should “stimulate” spending through various mechanisms—say, by employing people to build roads and bridges, or by increasing the overall money supply to lower interest rates .
  • 3. • You might think the argument between supply-siders and demand-siders would be settled by now, yet it rages on.• For more on this topic, check out Naked Economics: Undressing The Dismal Science, by Charles Wheelan, a senior lecturer in public policy at the University Of Chicago. (In fact, if you read one book on the economy between now and November 6, grab that one.)
  • 4. 2. Taxes• Like Chinese water-torture, the opinion pages relentlessly drip with arguments about “fiscal policy”— that is, how the government taxes and spends. The debate begins civilly enough, but often devolves into ideological yammering over what’s “fair” and what isn’t.• The tax code is nearly 74,000 pages. You don’t have to read them all, but you should have some baseline facts and figures at your fingertips. For that, see “The Numbers Inside A Hot-Button Issue”, a one-page primer by David Wessel at the Wall Street Journal. For more unbiased stats and analysis, check out the Tax Policy Center and the Congressional Budget Office.
  • 5. 3. The Federal Reserve / MoneySupply / Interest Rates• The amount of money in the economy is vastly important because it ultimately affects interest rates. If you care about the amount you pay on your home mortgage or student loan, or about what your employer pays to borrow money to keep his operation humming, then you care about interest rates.• The more dollars sloshing around the system, the lower the rates that banks must charge to lure enough customers to borrow all that money; the fewer dollars, the higher the rates.• Lower rates encourage spending; higher rates slow it down. Keeping rates too low for too long can trigger inflation, which decimates the purchasing power of those dollars. Four-dollar hamburgers annoyingly cost eight.
  • 6. Cont.• The very difficult trick: monitoring the money supply so that the economy stays strong but inflation doesn’t kick in. The Federal Reserve—headed byBen Bernanke and subject to Congressional oversight—sets “monetary policy”:• It determines how much money is in the system by buying and selling U.S. Treasury bonds. (When Uncle Ben buys bonds, he effectively puts more dollars into the system; when he sells bonds, he pulls money out.)• As economic issues go, monetary policy is a big one—and it’s fairly impossible to truly understand the Wall Street Journal, the New York Times or any other financial publication (let alone a crafty politician) without a fundamental grasp of it.
  • 7. 4. The Federal Debt• The U.S. government regularly spends more than it brings in, and borrows to fill the gap. The cumulative tally of all those annual deficits is called the national debt.• Carrying debt isn’t bad in itself, but carrying too much of it can be dangerous: Having to cover those interest payments gradually impairs a country’s ability to pay for other services (as anyone with a sizable credit card balance can attest).• Without sustained economic growth or substantial tax increases, the U.S. national debt is projected to rise sharply as aging Baby Boomers check out of the work force.
  • 8. • Four years into the latest economic downturn, the thorny question on everyone’s mind is: Should the country keep spending money in the short run to stimulate the economy (and thus keep adding to the debt), or should it reduce the debt by balancing its books sooner than later?• The answer isn’t easy, to say the least, but you should have an opinion about it. (For more hard data on this topic, check out the Peter G. Peterson Foundation’s website and the readily digested documentary I.O.U.S.A.)
  • 9. 5. Megabanks• Imagine you were invited to a very special casino where you got to keep all of your winnings while local residents absorbed most of your losses.• That’s essentially what went down in the latest financial crisis, with big banks and insurance companies playing the gambler role and taxpayers cleaning up the mess.• Lawmakers’ rationale: Those financial institutions were so critical to the functioning of the global economy that they were deemed “too big to fail” (see the book and movie by the same name).
  • 10. • The crisis touched off a wave of mergers and an avalanche of regulations designed to rein in the gamblers and avert future meltdowns—except that now we have even larger megabanks that are arguably way too big to fail.• (The 10 largest banks now control nearly 80% of all banking assets.) This issue is complicated, but you don’t need a Ph.D. in finance to get the gist.• (For extra fortification, read just about anything penned by Gretchen Morgenson andAllan Sloan, both former Forbes senior editors, now with The New York Timesand Fortune, respectively.)
  • 11. 6. Entitlement Programs• SocialSecurity, Medicare and Medicaid—the big three entitlement programs— account for nearly half of the federal budget.• As with the interest on the national debt, that percentage is set to rise fast in the coming years as Boomers retire.• Even if—especially if—you don’t intend to collect Social Security or Medicare for some time, the fate of these programs is at your doorstep now.
  • 12. 7. Health Care• The drama over whether Congress can lawfully mandate the purchase of health care may have subsided, but given that Washington remains so bitterly divided over the Affordable Care Act (and given that you, inevitably, will get sick), you should know what fundamental issues are at stake.• An absolutely necessary first step: Read “How American Health Care Killed My Father,” by David Goldhill, published three years ago in the Atlantic Monthly. You can’t fix something unless you know why it’s broken, and this brisk tome gets right to it.• (Hint: In the U.S. health care system, the customer isn’t the one who pays, and no one knows what anything really costs.)
  • 13. 8. Free Trade• The more open an economy is, the more reason to sweat competition from beyond its borders.• Free trade lowers the cost of goods and services by efficiently doling out the tasks required to deliver them; it also displaces some workers in the process.• This arrangement thrills some people and terrifies others—perfect fodder for a game of political football (see “The Folly Of Attacking Outsourcing,” in theNew York Times).• Globalization is here to stay. A huge question, for both sides, is how to retrain the displaced and get them working again. Keep an eye on that issue.
  • 14. 9. Immigration Reform• Speaking of putting people to work, how do you attract the most talented and industrious folks on the planet while thwarting illegal immigrants and protecting your borders?• The answer has sizable implications for the economy.• Here’s a decent primer: “Economic Impacts Of Illegal Immigrants In The United States.”
  • 15. 10. Income Inequality• A capitalistic system, in the aggregate, creates greater wealth over time. No one argues with that.• What many people do take issue with, however, is the widening gap between the rich and the rest.• The financial-services industry gets much of the heat: Despite the recent downturn, many Wall Streeters (the very architects of the calamity, some argue) have pulled down lavish bonuses the past two years.
  • 16. • Assume for a moment that some amount of income inequality comes with the territory in a capitalistic economy.• The next questions are: What’s the right amount, and who gets to decide? Wrestling with the previous nine points will help you figure out where you—and the candidates— ultimately stand.
  • 17. Do a lil research and get to know what you maybe voting for. Illiteracy is not an excuse with thevast amounts of information available to you.• Of course, more hangs in the balance come November than just our livelihoods. And no matter who gets elected, the President has less to say about the laws of supply and demand than you might think (see this report by the thoughtful gang over at Freakonomics).• Still, at $15 trillion and counting, it’s worth the time to understand what the candidates are saying about the economy—and whether or not it passes your smell test.