American Prosperity and Full Employment

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American Prosperity and Full Employment

A growing GDP is crucial if we’re going to have rising affluence and be able to keep Americans healthy, happy, and safe.  GDP increases in just five ways: 

  1. Through a rise in labor-force participation: When the number of people producing goods and services goes up—often due to a population increase—an uptick in production generally follows.  America’s labor force participation rate hovers today around a 40-year low of 63 percent; that’s one explanation for the country’s lackluster economic growth.
  2. Through discovery of new resources: The production of goods and services requires raw materials and other resources.  When a new source of raw materials—such as oil, minerals or lumber—is discovered, production can rise.  In large part because of fracking, the U.S. is now the largest natural gas producer in the world.
  3. Through an increase in labor specialization: When the labor force gains more human capital, including skills and general knowledge, producers gain the ability to make more goods and provide more services.  It’s one reason why education reform, at all levels, is so important.
  4. Through new technologies: The discovery of new processes, tools, or devices can lead to a huge jump in productivity.  For example, the invention of the assembly line sped up the production of automobiles, clothing, and toys.  When entrepreneurship results in new discoveries, the whole economy benefits.
  5. Through increased domestic and international trade: When people trade their money for goods and services, a mutually beneficial exchange occurs that, when multiplied across the entire economy, increases growth and well-being.  Reducing regulation, taxes, and barriers to trade will allow for more exchanges to occur.

On January 18, 2017, Fed Chair Janet Yellen said that with the U.S. economy close to full employment and inflation headed toward the Federal Reserve’s 2 percent goal, it “makes sense” for the U.S. central bank to gradually lift interest rates.  She went on to say, “Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road—either too much inflation, financial instability, or both.  In that scenario, we could be forced to raise interest rates rapidly, which in turn could push the economy into a new recession.”

The Fed raised short-term rates in December for only the second time since the financial crisis of 2007 to 2009, when it slashed rates to near zero and began buying massive amounts of Treasuries and mortgage-backed securities to push down long-term borrowing costs...

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