The Economy

In 2008, surveys show Americans are deeply dissatisfied with the state of the economy, more so than they've been for years. And that's not surprising, given the two major economic events of the year: record gas prices of more than $4 per gallon, and a mortgage crisis that has shaken the financial world. Economists still debate whether the economy is actually in a recession, but both developments touch people in very direct ways.

The Federal Reserve, the nation's central bank, is predicting sluggish economic growth of 1.6 percent for 2008. Inflation and joblessness have been increasing, however, and most financial experts say the economic malaise is likely to continue into 2009.

When it comes to economic policy, there are usually two different strands to the public debate. One is how to deal with the current situation; the other is which long-term policies are needed to keep the country prosperous. Recessions come and go, and the government can take short-term steps to make them less severe. Long-term policy addresses the big trends, and what will bring prosperity for most Americans.

Big Fish in a Global Pond

The United States is the world's largest economy, twice the size of the next largest country and pumping out a staggering $14 trillion in goods and services every year. The dollar remains the world's "key currency," the one that everyone else uses as a benchmark. The line among economists has been "when then U.S. sneezes, the world catches a cold" – that's how influential we are. And the recent troubles here have influenced world markets as well.

Looking over the last two decades, in many ways, the U.S. economy has done very well. There have only been two "official" recessions in the last 25 years, far fewer than in previous periods (the organization in charge of labelling recessions has not yet spoken about the current economic situation). American productivity, led by technological innovation, has kept growing steadily. Inflation and unemployment have been fairly low. Corporate profits and stock prices have been high.

But the world is increasingly one big market, and we're not the only player. China and India are growing rapidly. China has now surpassed Japan as the second-largest economy in the world, and most predictions say in a few decades it may surpass the U.S. as well. The European Union, with its unified currency and common economic policy, is a much more significant force than its individual nations were, and the euro is a potential rival to the dollar internationally.

That has caused many to worry about preserving American jobs. If goods and services can be produced anywhere, then the U.S. is facing challenges from other nations where labor and operating costs are cheaper. This first became a concern over manufacturing jobs, but even so-called "knowledge workers" – who work with words, thoughts, and analysis - could face competition from well-educated workforces abroad.

Powering Up

Energy is fundamental to the economy, and the price of energy underlies everything else. Energy doesn't just affect the price of the gas you use to drive to the supermarket, or the electricity needed to store them in the refrigerator. It's also part of the cost of the factory's work in building your car, the farmer's cost in harvesting the crops, and the supermarket's cost in having the food shipped and kept fresh at the store. When the price of energy goes up, the price of everything else is at risk of going up as well.

The United States has been fortunate over the past 20 years in that the price of energy has been fairly low. Energy, particularly oil, is a prime example of globalization: it's traded in world markets, where the United States is only one player among many.

There's a lot of debate over what's causing the price of energy to rise, with many blaming speculation in the oil markets. Others point to a worldwide surge in demand for energy, led by astonishing rates of economic growth in developing countries like China and India. Still others, including President Bush, have called for boosting domestic oil production by means including offshore drilling which, for environmental reasons, has long been banned.

But it will take years for new domestic production to come on line. Most experts say we'll be living with higher energy prices for some time to come.

The Credit Crunch

Credit, the ability to borrow money, is an essential part of a modern economy. Businesses borrow money to expand and create new jobs; individuals borrow to buy homes and cars. But the recent mortgage crisis raises an ongoing question, which is whether Americans are too fond of credit – or rely on it too much.

The mortgage crisis boils down to this: as housing prices skyrocketed over the last few years, and with interest rates at very low levels overall, banks eagerly made mortgage loans to people who were on shaky financial ground. Many people, lulled by years of low interest rates, knew these "subprime" mortgages carried escalating terms that would eventually be too heavy, but counted on their ability to refinance their loans.

Then the economy began to slow down. Banks cracked down on credit, people who had planned to refinance couldn't get new, cheaper loans and ultimately couldn't keep up with their payments. Foreclosure rates spiraled: in June 2008, the number of homes repossessed by lenders rose by 171 percent nationwide compared to the June 2007.

The red ink undermined many mortgage lenders, and the big financial institutions that stand behind them. In order to keep the problems from spreading throughout Wall Street, the federal government has been forced to take steps to shore up the financial markets.

These problems are showing their impact on the broader economy. Inflation, fed by energy prices, crept up by 4.2 percent in the twelve months ending in May 2008, as unemployment also increased, reaching 5.5 percent in June 2008, with predictions it may hit 6 percent or higher in 2009.

Corporate profits, which were at a 40-year high in 2006, eased off in 2008, with the Bureau of Economic Analysis reporting, according to one measure, declines in first quarter domestic profits for both financial and non-financial corporations.

Stock prices meanwhile, have been falling, with the price-to-earnings ratio of the Standard & Poors 500 dropping by 20 percent in the first six months of 2008 down to half of the 31 times ratio seen in 1999.

The Long Run

This current problem builds on some long-term issues that worry economists. One is that the U.S. has become a society that borrows rather than saves. The federal government itself is $9 trillion in debt, and the personal savings rate – the amount that individual Americans put away - has dipped into negative numbers. As a nation, we also buy more products from abroad than we produce and export – increasing the size of the trade deficit with other nations and decreasing the value of the dollar.

Economists debate over why this is happening, whether it is more an example of people who simply want to buy and spend more than they can afford, or whether more people have to borrow to keep up with their daily bills. The wages of average Americans have been essentially flat for 30 years, and the gap between the wealthiest and the poorest Americans has been growing.

Either way, these are troubling trends for the overall economy.

Choicework
For additional perspective on how society could address this issue, visit our Discussion Guide which sets out three alternative approaches.
The points of view are drawn both from what the experts say about an issue and from what the public thinks about it, based on surveys and focus groups. We call this section "Choicework." Each point of view comes with the arguments for and against, along with some potential costs and tradeoffs.

• From one perspective, the free market position, the best way to achieve a higher standard of living is for government to give free rein to a market-based system. In turn, higher growth generates more jobs and more opportunity for Americans.
• From a second perspective, the fair share position, excessive inequality is socially corrosive and morally wrong. For this reason, government must take measures to ensure that the benefits of growth are shared more evenly.
• From a third perspective, the equal opportunity position, the fact that income stagnated, until recently, for many Americans, is a result of our failure to give everyone an equal opportunity for economic advancement.