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Why the U.S. Economy is Screwed

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PostPosted: Sat Sep 12, 2009 6:16 pm    Post subject: Why the U.S. Economy is Screwed Reply with quote

A 1% per year difference in real GDP growth makes a big difference after (and over) 10 or 20 years. Using a scientific calculator, a 2% real GDP growth rate will increase real GDP from $14 trillion to $17.1 trillion in 10 years (type 1.02, then hit the y^x key, then type 10, then hit = then hit X or the times key, and type $14 trillion or 14,000 for a smaller number). However, a 3% real growth rate will be $18.8 trillion after 10 years, or a difference of $1.7 trillion after 10 years. The difference is about $4 1/2 trillion after 20 years. Also, government spending has been growing much faster than nominal GDP over the past few decades.

It's remarkable, U.S. per capita income is over $10,000 a year more than Western European countries, and the cost of living is lower in the U.S., because of lower prices, interest rates, and taxes, given the U.S. was basically a wilderness 200 years ago, while Western Europe accumulated over 2,000 years of wealth. Also, the vast majority of immigrants to the U.S. were poor.

I wonder what Americans would do with an extra $1,000 a month.

In my case, after I received a roughly $1,000 a month after tax raise at work, I initially used most of it to pay down debt that was costing me $400 a month in interest and fees, while I also increased my consumption and caught-up on bills. Eventually, I paid off the debt and the $1,000 a month raise allowed me to increase my income by $1,400 a month, which was all used for consumption. Later, I saved an average of $300 a month. So, in my case, saving (i.e. shifting from borrowing to saving) was the last thing I did with the extra income.

It would have been more efficient to pay down the debt with 100% of the raise, and continue to stay within my original budget, until the debt was paid off. However, I rewarded myself with a higher level of consumption for making progress on my debt and bills.

I suspect, most Americans would do the same thing if they received a raise at work, a similar tax cut, or a similar government cash benefit. However, creating a new government job, for example, may have done almost nothing to help me pay off my debt, unless perhaps I was hired for that job. I think, a permanant tax cut would have a powerful impact on consumption. However, it's likely the Bush tax cuts will be allowed to expire in 2011.

The government is crowding out the private sector. People don't understand the U.S. economy is screwed, from huge government spending and slow growth policies, which will make it harder to pay down that debt.

They're still blaming Bush. However, Bush wanted another tax cut in late '08, which didn't get passed. A deep contraction and slow recovery were unnecessary. Anyway, currently, the U.S. is back to the pre-Lehman mild recession level.
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