You’re standing in an elevator. The doors begin to close, a man and his mop sneak through the opening and settle in the corner. Minding his business in his blue jumpsuit, the janitor fidgets with his mop; seemingly searching for some small talk. There’s fifteen floors to the top and you feel as though you should probably say something. As you’re trawling through your mind for looking for some idle chit chat, Janitor breaks the silence.
“How ’bout the economy, eh.”
Janitor probably feels as though the government is doing a lousy job of managing the economy. They’re making the wrong decisions, focusing on the wrong things and don’t understand Janitor’s needs. But you know the way the economy works. Because you have planned for this situation by reading this blog. You are prepared.
“Yes Janitor, I agree. The economy is a mess. But while we have this short time together, allow me to explain the complex nature of the economy and why it is difficult for those in charge to get it right. The economy consists of thousands of different components that all act and react differently as policies and external factors change. There are many arguments that the economy should be left to its own devices without government involvement. However, it is important for policy makers and market drivers to find a happy medium in order for our economy to grow. Take for instance, big business taxation. When the government goes hard on big businesses and tax large amounts of their revenue; eventually, we all feel the pain. Do you like that mop of yours, Janitor? Imagine if the company that manufactured that mop was taxed at double their current rate. They now have to contribute more of their revenue to taxes, taking away valuable capital from their research and development department that brought that very mop into existence.
You and I don’t have the resources, capital, or infrastructure available to invest in creating cool stuff that everyone likes. That is where we rely on big firms to do this work for us. Companies like Apple, Google, and Microsoft offer useful products and services, but also contribute to the economy in a handful of other ways. Now, I know you’re just a hard working Janitor, but all of this has some relevance to you. Essentially, a country’s main channel for measuring economic growth is their gross domestic product. By adding up America’s private consumption, gross investments, government spending and net exports, we get a number that should be getting bigger every year. If it’s not, then things aren’t going so well and we might find ourselves in recession. Policy makers juggle all of these components to ensure our GDP continues to rise, much in the same way as this unusually long elevator ride.
Lowering interest rates promotes spending and investment and therefore creates a higher GDP. On the flipside, lowering interest rates devalues the dollar and causes inflation. Inflation is bad. It decreases the interest rate that pensioners would receive on long-term investments on fixed income. Does Janitor Jr want you living with him when you hang up your mop?”
The point you’re trying to make is that the economy is complicated. Now, go forth and ride elevators, confident in the knowledge of your new economic rhetoric.