Economic Challenges ahead for the next Commander in Chief

America has a momentous decision looming. Democrat or Republican? Clinton or Trump? This decision will affect the political landscape of the United States, and of the world. Being President of the United States is a prestigious position; the job comes with many perks but also lots of challenges. During their tenure the new President will face many obstacles, and in the world’s current climate, many economic challenges present themselves. Identifying and overcoming these challenges is paramount to the success of the next President’s term in office. Many of the issues are not wholly and immediately clear, and there is certainly no straightforward answer. But I would urge voters to listen closely and wade through candidates’ rhetoric in order to judge which Presidential nominee has the answers.

The economic backdrop that the next President will inherit is a turbulent one. An economy in which growth is less than expected, coming in at 1.2% during the second quarter of 2016. An economy that is stricken with political and social instability and division. Such circumstances do not facilitate growth and only serve to compound the issues of the American economy. These pressing issues cannot be ignored. But, by the same token, they cannot be solved directly. The underlying, microeconomic issues must first be addressed in order to manage the macroeconomic issues of growth and unemployment that affect the lives of millions of Americans and their aspirations for the ‘American dream’.

 

Slower Growth and Secular Stagnation

Secular stagnation is not an easy concept to capture; many policymakers may not fully understand this issue and therefore struggle to diagnose and correct it. It is a theory in which advanced economies have entered a protracted period of low growth, low interest rates and low inflation. While ambiguous and not wholly useful, this theory does focus the attention to the macroeconomic issues facing the economy. The flavour of the moment for monetary policy across most developed economies is one of lower bound interest rates, yet such rates appear to be an ineffective stimulus in this turbulent economic environment. When these strategies have not worked, the Federal Reserve has turned to unconventional policies such as Quantitative Easing as a remedy for the economy. Controversial, and still relatively new, this policy is not the favoured medicine. Furthermore, while it did succeed in stabilizing the financial system and staving off a disaster on the scale of the Great Depression, QE hasn’t provided the economy with a strong enough boost to return it to its pre-2008 growth trajectory. As a result, fresh thinking is required from the incoming President who must address this economic stagnation.

The soon-to-be President should seek out a new model of growth

Local boom can co-exist with a national doom and herein lies the problem. This issue, and failing to spot it, has caught out America before in 2007-08. While the housing bubble boomed, the US economy had few areas of genuine growth. With economists looking at the aggregated economic data, the pocket of boom was allowed to expand unnoticed, ultimately leading to the dramatic and catastrophic burst. American policymakers must learn from the lack of scrutiny applied to the debt-fueled bubbles. Therefore, the soon-to-be President should seek out a new model of growth, focusing on increasing competition and productivity growth, and carving out a path towards a more prosperous economic future.

 

Decline and Competitiveness

Slower levels of American economic growth highlight another issue that is seemingly imbedded in the economy – manufacturing decline. At an unprecedented rate of loss, America lost 5.7 million manufacturing jobs in the 2000s. This represents a staggering loss of 33% of jobs in the industry. Evidently, a drop of this magnitude cannot be ignored and is one that has significant ramifications for the state of the economy. Many prominent officials in the US view this fall in employment in the industry optimistically as ‘the majority of manufacturing job losses is due to productivity increases’. While productivity increase is a major goal that every economy should strive for, when it comes at the expense of millions of people’s jobs, one must question truly how positive this is. Furthermore, under historic comparison, this productivity notion does not hold. Between 1990 and 1999, manufacturing productivity grew by 56%, and between 2000 and 2009 it grew by 61%. Yet while these rates are comparable, manufacturing employment declined just 3% in the former decade, but 33% in the latter. Clearly then, the cause cannot be wholly attributed to improvements in productivity.

 

The principal reason for the US losing 5.7 million manufacturing jobs from 2000 to 2009, is due to the decline in global competitiveness. This decline is a problem in its own right but, as previously alluded to, the loss of jobs in manufacturing and reduced global competitiveness have wider ramifications. Therefore, the incoming President must seek to address the state of the American manufacturing sector as a means to begin to solve the much bigger issues of the economy. Management of these issues will aid American growth and will begin to address the key economic issues that the President will face.

 

 ‘It sticks with you every day’ Ian Foss, policy liaison at Federal Student Aid

Student debt is an economic issue of ever-increasing importance in the minds of Americans. With 40 million Americans – representing nearly nearly 70% of graduates – leaving with debt, the mounting student debt crisis has begun to capture the attention of key policy makers. Debt has become entrenched as the norm in many consumer minds: you take out a loan, make your purchases, and repay at a time that suits you. But this mindset is causing a lost generation of consumer spending among young adults. With student debt totalling $1.2 trillion in America, student loan debt constituted the second largest debt burden on the American economy (exceeded only by mortgage debt). Clearly, the issue is a sizeable one, and one that does not have a clear resolution.

Due to the market failure that arises in providing finance to students, most student loans are financed by the federal government. Undergraduates require loans for investment in their future; the student thus seeks the loan in order to acquire human capital. The borrower in this case cannot secure the loan and post collateral against it as the outcome of this loan is not realised until a future date.

Unlike a mortgage where the property is pledged as collateral and the lender will repossess this property in the case of default, prospective students usually possess no assets to secure the loan against. As a result of this, the private sector is unwilling to make these loans as they cannot be sure of repayment. Thus, the burden falls upon the federal government.

This presents a problem for government finances – defaults on student debt cost the federal government a $39 million loss every year. This is money which could be used to fund public works schemes, social insurance or public healthcare that America so desperately needs. By injecting the money this way, the President could kick start the multiplier and get the American economy moving in the right direction.

Yet, the student debt crisis does not just drain government coffers. It is currently creating a lost generation of spenders by draining consumer spending power at a relatively young age. While the burden may initially prevent borrowers from buying a home, car or reaching other economic milestones; older student borrowers are at risk of losing their retirement benefits. According to the Government Accountability Office, about 36,000 Americans lost a portion of their Social Security check in 2013 due to an unpaid federal student loan. Through lowering consumption in early life and reducing retirement income, student debt represents a significant burden throughout graduates’ lives. This creates a drag on the American economy – a drag that cannot be afforded or accepted in the current climate, and a drag that must be tackled.

 

An Ageing Nation

It’s no great secret, and shouldn’t come as a surprise that the average global age is rising. Many factors account for this phenomena, such as improvements in healthcare to lower fertility rates. By 2050, the number of people aged 85 and over in America is expected to increase by 350%. The effect of this increase will undoubtedly be huge, and one that the incoming President must seek to address. This problem is then further compounded by current demographic trends that suggest the working age population will not grow at an even slightly comparable rate. The number of people aged between 16-64 is projected to rise by only 33% during the same period. While alarming and difficult to digest, these figures fail to illustrate just how this problem will impact America. The impact will be slow to take effect, but when they eventually begin to strangle the economy, Americans will either thank or condemn the actions that the incoming President took to address the issue.

The President must be equipped and ready to act

Firstly, the 2017 President must aim to counteract the rising dependency ratio. Such a ratio will put increased strain on the working population to produce more output, pay higher taxes, and work longer hours in order to sustain the needs of the older generation. This commitment will not be an easy one for America’s workers and can act as a drag on growth as investment opportunities may be foregone following the need for higher taxes and immediate consumption. The increasing number of pensioners will also place strains on the federal government. The share of GDP devoted to Social Security and Medicare is projected to increase 4 percentage points by 2050. This will put a serious strain on the federal budget and answers on how to meet this increased spending must come from the next President.

A final impact will be the pressures placed on the private sector. Undoubtedly, demand for nursing home care will sky rocket along with the population age. The onus of this challenge falls mainly on private enterprise to adequately direct resources to this production. However, the free market often fails, and if it does in this instance then the President must be quick to intervene in order to prompt the market to meet these needs. This may be achieved by tax relief; public works schemes or subsidies. But whatever the form, if the need arises, the President must be equipped and ready to act.

Clearly then, the ageing population dilemma is one that must begin to come to the forefront of policymakers minds. This issue is one that will soon be realised, and adequate safeguards must begin to be put in place to protect America from this reality.

 

On Friday 20th January 2017, either Hillary Clinton or Donald Trump will be sworn into The White House. Their time may be turbulent and will be full of challenges. With this in mind, the Presidential hopefuls should start considering these challenges before taking office in order to achieve success in their potential Presidency. For the American electorate, these issues and challenges and how they are handled will be key to the state of economy. To ensure a healthy and thriving economic environment for the forthcoming four years, the voters must decide which hopeful is best suited to face these challenges.

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