What’s Going on with the US Economy? It’s complicated. By Tom Timberman

First Some Statistics:

The US Bureau of Economic Analysis released final data on the economy’s 2021 performance; from October to December, GDP grew at an impressive rate of 6.9%. For the total 12 months, the increase was a very respectable 5.7%.  The GDP projection for 2022 is 3.9% . 

Six million jobs were added during 2021 including 473,000 in the manufacturing sector. And extending, the period to end-March 2022 the total rose to 8 million. America’s overall economic growth and jobs-added, outpaced any other wealthy country in the G-7.  

Current Reality Check:

OK, but with record inflation rates, particularly in gas prices (East Coast average $4.28, West Coast $5.75), it doesn’t feel like a great economy, despite the stats. Why?

There are a number of reasons and the Federal Reserve has intervened recently to force inflation down by increasing the interest rates banks and their clients pay for loans. 

1. US Wages have increased 5.5% which contributes to higher service delivery &  production costs. The end-March Personal Consumption Expenditures Index noted a 6.6% cost hike for an average consumer’s purchases.

2. Pandemic Related Supply Chain Issues, e.g. China Lock-downs, factory closures, worker absences in other centers of export production and difficulty obtaining manufacturing or assembly input items.  And Russia’s invasion of Ukraine (Breadbasket of Europe) has severely limited agricultural, fertilizer and vegetable oils production and export. Exacerbating the above, is the unprecedented increase in prices charged by the ten largest international shipping companies.  Their 2019 profit level was $23 Billion, but in 2022 it is projected to be circa $300 Billion.

3. International Limits on Oil Production has led to the widespread gas pump shock, referred to above. Much increased gas prices are also contributing significantly to current inflation levels linked to shipping and delivery.  What happened?

• • During pandemic, oil producing countries reduced production an average of 10%, when global demand dropped. They’ve welcomed the record profits as demand has risen and are refusing to increase production or doing so very slowly. For example, Shell Oil (largest European provider) just announced its first 2022 quarter profit, a record breaking $9.1 Billion.

  • The USG asked Saudi Arabia and its partners in the Organization of Petroleum Exporting Countries (OPEC) to match increasing demand with increased production levels. The answer was no because, they said, it’s the Western sanctions on Russia that are responsible for the crisis.   

Economic Philosophies Impact Policies:

No surprise. However, it’s interesting that various commentators describe President Biden’s economic approach as similar to President Lincoln’s. The Republican Lincoln believed workers, not employers, were the engines of long term economic growth. The wealthy Southern Democrats of the day objected saying strengthening property rights of the rich should be the priority. They claimed to know best where in the US economy to invest to increase their fortunes, thus expanding them and the economy at the same time.    

The Federal Government should, in Biden’s view, nurture, protect and train/educate workers at younger ages, because given access to resources and a much improved public infrastructure, they would work hardest to grow the economy across all sectors. The post-WWII US economic policies were based on the belief that the government should manage the economy to benefit everyone, not just the rich. 

In the 1980s, President Reagan introduced a reinterpreted Austrian Economic School policy (fierce free marketers, anti-government economic intervention). His Administration reduced taxes largely for the top 10% of income earners & large corporations, to ignite private capital investment in more efficient production of consumer goods at lower prices. President Trump did much the same and cut more Federal regulations. 

American economists’ continuing concern since the 1970s  is the widening  income gap between the top 5-10% and everyone else. The former are increasing their wealth much faster than the middle (size shrinking) and lower earners (size growing). In 2018 The median  range of middle income Americans was $58, 100 – 86,600  and upper from $126,100 – 207,400.  The immigrant (South Africa) American Elon Musk’s personal fortune is estimated at $266 Billion making him the richest man in the world.   

Tom Timberman is an Army vet, lawyer, former senior Foreign Service officer, adjunct professor at GWU, and economic development team leader or foreign government advisor in war zones. He is the author of four books, lectures locally and at US and European universities. He and his wife are 24 year residents of Kent County.