July 2, 2004
Tracing Our Economic Evolution
Are you better off today than you were four years ago? From an economic point of view, it’s a pretty simple question. Take a look at your bank balance, your standard of living, and, perhaps, your job security, and no doubt you can come up with an answer. It’s when you consider the implications of the question that things begin to get complicated.
Four years, of course, is the length of the election cycle for many important political offices, and the person asking you the question is probably courting your vote. But unless you’re a relative or a political office holder yourself, how much did the person sitting in the White House or the Governor’s mansion have to do with your own economic performance?
That’s a question with no simple answer. But as we look back four years to assess the condition of our own finances, as well as the economy as a whole, it’s useful to think of our economic evolution as the product of three, distinct forces.
Over a very short span of time, changes in our economic condition are usually dominated by so many different, individual events that it is hard to broadly characterize them as anything but random. For individuals, it’s the nuances of our businesses and jobs, which in turn are affected by the opportunities and challenges in the marketplace that make our incomes go up and down. For cities and regions, it is the fate of large employers or important industries that make their economic fortunes surge and dip.
The data on job turnover and income fluctuation tell us that this irregular component of economic growth is significant. As economists and statisticians track the size of the overall economic pie, they overlook the sometimes widely fluctuating fortunes of the individuals and households within it.
But when you stretch it out over a longer time, random fluctuations in our welfare tend to even out, and other important factors emerge. One important component of growth is what economists call the business cycle. Since the days when the first economic data were recorded, there has always been a boom and bust cycle in economic activity. What were once called “panics” are now called recessions, but names really don’t matter. There have always been, and probably always will be, periodic declines in our collective confidence in the future that produce contractions and economic declines like what we experienced two years ago.
Since these recessions and recoveries affect our economic welfare, it’s important to know what part of the cycle you are on when assessing your economic status. In 1984, a recovery year, candidate Ronald Reagan asked audiences to compare their well-being to 1980, the trough of a recession. Over that interval of time, the cyclical component of change dominated all others.
The last component of growth is the underlying trend. Imperceptible in any given year, its force is felt over the course of decades. The trend growth in the U.S.economy has increased in the last twenty years, and as a result the gap between the size of our economy and that of some other industrialized nations has widened. But within our country and within our state, there are important differences in underlying growth that are producing disturbing differences in economic welfare.Those differences in trend growth have produced some unhappy results for Indiana ’s economic well-being, especially for the regions outside Indianapolis . But in all the noise caused by the fluctuating economic cycle and other random events, it has too often been difficult to focus on the issue. Yet its consequences, in terms of population growth, earnings growth, and land values, are difficult to ignore.
About the Author
Educational Attainment, the 21st Century Fund and the Future of SchoolingIndiana ranks 42nd in educational attainment.
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