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Economics 101
What Drives the US Economy?
What is the major driver of the American Economy? Two words, consumer spending. That’s you and I. Don’t believe me? Then go to the following US Department of Commerce website and look at what makes up the largest part or our Gross Domestic Product (“GDP”) http://www.bea.gov/national/index.htm. Over the past 5-years, consumer spending has accounted for an average of 70% of the US economy.
Moreover, business investment and spending represents another 14% of the US economy. But wait, if consumers aren’t buying, then businesses will not have the money to invest in maintenance and growth. So in fact, consumer spending actually directly influences 84% of the US economy!
Many people, some of our political leaders included, do not understand the link between spending and jobs. The simple fact is that if someone doesn’t walk in the door of a business and buy something we have no economy. Every time we spend, the business we buy from pays a portion of our dollars for employee wages. In turn, those employees spend and thus generate additional wages, and so on. At every step that spending occurs and wages are generated, tax revenues for local municipalities, states and the Federal government are produced. This cycle of spend and wages is what creates a healthy economy with low unemployment, a vibrant housing market, strong tax revenues, robust business profits and high stock prices.
Simply stated, consumer spending creates jobs, jobs create consumer spending, and both generate tax revenues.
When spending slows, businesses can’t afford to pay employees and must lay them off. The unemployed are unable to spend, because they have no income. Those who have jobs become fearful of losing them, so they stop spending. It becomes an economic death spiral of accelerating job losses and slower spending, with simultaneously plunging tax revenues. States, like California, end up having major budget crises, and approach bankruptcy. Welcome to a recession. This is where we are today, and it isn’t pretty.