If you follow business news, or even political news where the debate weapon is the trajectory of the economy, you’ve likely picked up on the opinion that the U.S. is headed into a recession. This, after all, has been the consensus projection for over a year.
These predictions are a lot like the axiom “live each day as if it were your last, and one day you’ll be right.” Economies, even the strongest ones, do not grow in a constant upward path. Business cycles and external shocks happen, eventually, causing contractions. Not all recessions are major, and some are even over before they are officially declared. Eventually, however, they do happen.
Economics is based on the premise of “rational expectations”. It’s hard to form rational expectations if you don’t actually understand what all terms and statistics being thrown about actually mean.
There are two main tools that the federal government uses to manage the economy, monetary and fiscal policy. Monetary policy involves the setting of interest rate targets, managing the money supply by buying or selling bonds, as well as setting reserve requirements for banks which also control the amount of money added to or taken out of our system.
Fiscal policy involves spending on behalf of the government, and the borrowing that is required to finance deficits. In theory, it could also mean bringing in surplus tax revenues during good times, but the last time we ran a small budget surplus was 2001, and we’ve operated with a net national debt since 1846. For those that knock Keynesian economics, note that we haven’t tried running surpluses during good times consistently for almost 200 years.
What has been keeping the economy running relatively strong over the past year is the fact that consumers, on average, are still financially better off than they were prior to the pandemic. Consumer spending is generally more than 70% of the U.S. economy, so when consumers spend money, the…
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