Causes of US economic contraction 2001-2003 and expansion 2003-2005

Economics

Causes of Contraction (2001-2003) and Expansion (2003-2005) of the Economy

Perhaps there is no more important question than the future, none that affects more deeply our private destinies and those of our children." (Heilbroner & Thurow, 1982) This report is about capitalism and the causes of contraction and expansion in our economy. The economy seems to currently be churning out good numbers -- but does that mean the economy is okay? The overall economic health of the United States is sending mixed messages even though all seems better than a few years ago. Consider the contrast of Investment Business Journal's message that new manufacturing orders are on the rise and new home sales are up because of low interest rates at the same time we hear concerns regarding high unemployment figures, major problems with the airlines and growing trends of plant closings due to relocation and globalization. In addition, the Baby Boomers are also an economic phenomena due to the fact that they are nearing retirement while healthcare costs skyrocket and social security may be irreversibly broken. What about the fact that automobile sales are on the rise as the cost of a barrel of oil is at the highest point in modern history and concerns like Iraq are said to be under control - that is, as long as you're not a soldier stationed there. Currently things are looking up... or, are they?

Carl Marx's theory on performance within capitalist economies focuses on the rate of profit. In other words, as the rate of profit increases, capitalism as an entity remains prosperous. This entails that business investments would be high, unemployment would be low and the basic patterns and living standards of the society's workers would inherently rise. but, if that same rate of profit was to decline or to be generally low, prosperity would stop, investments would decline or worse, be nonexistent, unemployment would increase and the obvious result would be that living standards would decline. In addition, Marx also suggested that capitalist economies are on a never ending cycle of the rate of profit decline during periods of prosperity and expansion which causes periods of prosperity to turn into periods of depression. This is one explanation for our current swings and contractions.

There is an impression that our economy has been experiencing very high levels of profit and the media has even recently called this a 'profit boom'. This is because from the outside looking in, the rate of profit has increased significantly. Investment Business Daily contends that throughout the third quarter of 2003, the economy was expanding at an unbelievable rate of over seven percent and the labor cost element in the Productivity Index had increased steadily as compared to a year earlier. The Labor Cost Index measures the labor costs per unit produced and there is no doubt that non-farm productivity was rising. Statistics like these imply that the expansion of the economy from recent contractions was the best on record over the past twenty years or more. An economic spurt like that should have gone a long way in reducing huge unemployment figures, cutting the number of personal bankruptcies and making workers whole again.

But, there were underlying problems that the average person may have missed. The fact that real wages for the nation's employees have been stagnant and even declining over the past few decades contradicts the profit boom. "Total employment increased to 138.6 million in November, and the employment-population ratio rose to 62.4%. The civilian labor force and labor force participation rate also increased, to 147.3 million and 66.3%, respectively." (Employment Situation Summary) This only shows that job creation was up but the jobs were not quality jobs. This is at a time when the increases in productivity should have lead to significant increases in wages and new jobs. "Employment continued to trend up in November and the unemployment rate, at 5.9%, was essentially unchanged from October, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Non-farm payroll employment rose slightly over the month (57,000)." (Employment Situation Summary) Thus, the rate of profit as it applies to real wages and productivity may not present a true picture of what is going on. If the rate of profit increases it should lay a foundation for a return to prosperity where real wages and jobs would also increase.

The modern world is now a global market-based economy. Globalization is more than a race between the United States, China and the developed and emerging nations to see who can drain the world of its oil resources quicker than the other. "The global appetite for crude in 2003 will grow by a robust 1.9%, or 1.44 million barrels a day, and in 2004 by 1.5%, or 1.16 million barrels a day. The IEA raised its estimates for daily demand growth in the two years by 160,000 barrels and 90,000 barrels, respectively." (Stanley) Actually, oil and other natural resources are just a few reasons why the world is moving to a global business trade environment.

Technology has made it possible to move billions of dollars in milliseconds to any locale in the world and the internet has created many new opportunities for trade and investment on a global scale. When we hear the word globalization, most think that it is a new phenomenon but these are not modern inventions or recent revelations. Adam Smith and his invisible hand concept from 1776 in the classic work an Enquiry into the Nature and Causes of the Wealth of Nations was not even the founder of world trade. The reality is that long before Christopher Columbus discovered America or Marco Polo saw Asia; world trade linked many disparate societies into highly complex and extensive systems of finance. Global trade can be traced as far back as the earliest documented histories of man.

Globalization is not all good and has inadvertently caused many new problems. The United States and world economies continue to sputter as the world learns to contend with economic issues such as inflation, the effects of past and potential future acts of terrorism and the on going oil crisis. Corporations in America have been highly profitable but as noted, at the expense of relocations to new and emerging markets. The automobile industry for example has had to move into emerging areas that offer cheaper labor and other economic benefits. This creates a need to cut jobs all over the United States.

Other industries like the airline industry have their problems like ever increasing jet fuel costs, pressures of maintaining and replacing aging fleets and new human resource concerns like salaries, healthcare costs and tough competition. Americans must understand that airline problems entail more than just fewer flights available. The industry employs a very large portion of the American population in one way or another and a failure of any single airline or the closing of an automobile plant in Detroit affects us all.

The Gross Domestic Product is one way of monitoring what is occurring in the United States economy. The nation may be out of recession, but the country has not kept pace with the majority of the world in regard to output. The United States eighteen month forecast for the Gross Domestic Product was expected to remain at near 2.7% annually. This is good until we note that in comparison, the combined first world nation's Gross Domestic Product is estimated to be steadily growing at more than 3%. The United States major debt issues and completely unbalanced trade deficit will continue to force the nation to remain the world's largest debtor nation and fall behind in trade.

A second good monitor of an economic situation is inflation as monitored by the Consumer Price Index. The Consumer Price index is a tool that measures the change in the cost of a typical wage-earner's purchasing for both goods and services. Consider how recent trends in the price of oil affect consumers. All manufactures throughout the world are dependent on oil or some other fuel which power plants. But Americans also need oil and gas in their heat their homes and fill up the Hummer H2. So the price of oil has a much greater effect and is a good predictor of the cost of things in the future. It is more than obvious that the costs over many years have continued to rise. The situation in Iraq as well as recent tax issues of Russian oil producers and world demand have prices higher than ever. Iraq and the issues in Siberia have forced OPEC and other oil producing nations to boost production. The consumer price index will continue to reflect the problems associated with that dependence of foreign oil.

The unemployment rate and the United States economy's job growth trends as noted earlier are also good indicators of how things are going. Recall the last presidential race -- both presidential candidates quoted completely opposite outlooks on the nation's job growth and unemployment. It appeared that the figures the two campaigns used represented completely different countries. Bush implied unemployment figures were declining and Kerry touted very high unemployment figures. In hindsight, it appears that the labor department statistics concurred with the Kerry camp. When Bush still won, unemployment trend indicators seem to be coming true now and there seems to be more problems on the horizon for the economy. The Bureau of Labor Statistics indicated recently that new jobs being created in the economy were the types of jobs that cannot fuel economic growth. Thus, the economy is and will continue to lose jobs to cheaper labor markets around the globe.