The national political arena is still reeling from the after-effects of Osama Bin Laden’s killing. Of course there are a few that claim the entire thing was faked, but all things considered, these “deathers” are few and far between compared to the “Obama birthers” and “9/11 truthers” out there. Slowly the nation is shifting its focus back to the economy. In the spirit of this national focus, perhaps a brief explanation is in order regarding how, exactly, we got to the situation we now find ourselves in.
First, an explanation of basic economic principles. An economy is cyclical, with a cycle consisting of growth or “boom cycle” and a cycle consisting of decline or “bust cycle.” The boom cycle is indicated by an ease of obtaining credit (e.g. loans) and an increase in the cost of commodities. It is, essentially, a time of economic prosperity and growth.
However, the boom cycle is always followed by a powerful bust cycle. The most powerful of these bust cycles are indicated by the bursting of rapidly expanding markets (i.e. the .com bubble or the housing market) due to a lack of sustainability.
These bubbles are a symptom of an economy which is growing too fast, causing the boom and bust cycles to both occur much more rapidly and to be much more pronounced.
The largest bust cycle in recent history (in our country) was the breakdown of loans made after the end of WWI. Germany was forced to pay reparations to us, reparations which they could not afford to pay. They took loans from other allied countries in order to pay their debt to us. The allied countries had to take out loans from us in order to provide Germany with the money required to do this.
Even though any child can see that this was doomed for failure, evidently no one really cared back then.
When the inevitable happened and the whole system fell apart, the country fell into what we now call the great depression. Roosevelt helped bring us out of the depression by investing in social programs which put people back to work repairing American infrastructure. This way they could afford to buy things, stimulating the economy. When WW2 rolled around, our economy was in a good enough shape that it could begin mass-production on a scale never before seen. In the aftermath of the war, our nation was in great economic shape.
During the 1950s, we were the world’s number one exporter of goods.Today we are the world’s number one importer of goods. Why? Globalization.
Back when we were exporting goods, we were rolling in cash because we were getting payed to work at all these factories manufacturing goods. With this extra money, we could afford to buy luxury items like a T.V. or a second car.
Soon, someone realized that these same goods could be made for a fraction of the cost in much poorer countries with much more lax worker protection laws. The great migration of jobs overseas began. You can probably see why this was another plan that was not sustainable. Soon Americans stopped having as much excess money to spend on luxury goods, because without the producers of those luxury goods, they had no jobs to make money from.
Of course, the actual cause of our current mess is a little bit more complex than that. During what is considered our greatest time of economic prosperity (where the boom/bust cycle was so mild it was hardly worth noting) came in the 1950s and 1960s. During this period of time, the income tax rates for the top tax bracket of our population (those making $250,000 or more a year) hovered between 90 and 80 percent. This massive income tax helped retard the boom/bust cycle, massively reducing the chance of another recession.
Slowly, over the years, this percentage was decreased and a myriad of loopholes were added to the tax code to help stimulate economic growth. Unfortunately, that economic growth was much too rapid to be sustainable, leading to larger booms and devastating busts.
This, combined with lax financial regulation, lead to a great time of economic prosperity in the early 2000s after George W. Bush drastically lowered tax rates on the wealthy. Of course, it also lead to the financial crisis of 2008 and our current recession which the nation is still struggling to break free of.
There are many more nuances regarding why we are in the dire straits we find ourselves in (tax cuts decrease government revenue and make no fiscal sense in a time of war, which is most certainly what we are in) but that is a general explanation of our nation’s economy and why we are in our current mess.