YOU DECIDE: Do we have different economic problems?

Date posted: March 2, 2012

Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.

Media Contact: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

By Dr. Mike Walden
North Carolina Cooperative Extension

The economy, the economy, the economy! It’s the main issue around the dinner table, the office water cooler, media talk shows and of course, in the political campaigns. Just about everyone has an idea of what the problems are and what the solutions should be.

But if you listen, clearly everyone isn’t on the same page. Some say the major problem in the economy is too much spending, either by government or consumers; while others say just the opposite — spending isn’t high enough! We also see differences on taxes; some see them as a problem, while others see them as a solution.

We also don’t have agreement on where today’s economy stands. There’s widespread perception the economy is still dead in the water, with unemployment uncomfortably high, the housing market continuing to struggle and gas prices headed up again. But this viewpoint isn’t universal. More optimistic observers point to more than 3 million new jobs in the last two years and record levels of factory production.

So are people disagreeing about the economy just to be disagreeable and maybe support a particular point of view? Or is there a way to make sense of these differences that seem to be pulling in so many directions?

Part of the problem may be that there are different kinds of economic problems, and interestingly, solutions for one set of problems may be harmful for the other set.

Let me explain. For generations, economists have found it useful to categorize economic problems into two groups. One group identifies problems related to the irregular ups and downs in the total economy, which we call the business cycle. Each business cycle is composed of two parts.

The good part is called the expansion, and during it business improves, jobs increase, investments gain value and standards of living — on average — rise. The bad part is called a recession, and of course, we know what happens then: sales drop, unemployment rises, investments fall and standards of living deteriorate.

Issues related to the business cycle are called cyclical problems. The most obvious cyclical problems occur when the economy is in a recession, with the focus being on curbing unemployment and sparking an economic revival.

But there can be cyclical problems even when the economy is improving during an expansion. Often, concerns will develop about rising inflation, higher interest rates, labor shortages and — in some areas like North Carolina’s Triangle region — population growth that is outstripping the development of roads, schools and other infrastructure.

The second set of economic issues share in common the fact they are present in both the good parts (expansions) as well as the bad parts (recessions) of the business cycle. They are fundamental issues that go to the foundation of the economy, and they affect the long-run growth path of the economy. Economists term them structural problems.

Examples of today’s structural problems include the continuing impacts of globalization and rising educational needs on the labor force; the forecasts of ever higher federal debt and projected financing shortfalls in programs like Social Security and Medicare; the meaning of our aging population for government finances, the job market and health care; and the challenges of rising energy costs and the quest for energy alternatives.

Economists argue it’s useful to keep cyclical problems and structural problems separate for two key reasons. First, they can help us understand why the economy doesn’t perform the same in all states and regions.

For example, it is well-known that North Carolina’s job market has lagged the national labor market in recent years. Certainly cyclical problems related to the recession have hit both the nation and North Carolina. But it can also be argued that on-going structural problems — particularly related to globalization and the reduction of labor inputs to manufacturing — have been affecting North Carolina more than the nation.

Also, once the cyclical issues related to the recession subside, many regions in North Carolina — often in rural counties — will continue to experience very high unemployment. But this isn’t because the recession hasn’t ended. Instead, it’s because the structural problems in those areas continue.

My last comment leads to the second reason it’s important to keep the cyclical and the structural problems separate. It’s because the policies designed to address each set of problems are often different and sometimes even conflicting.

Here’s one good example. The federal government has reduced the payroll tax workers pay to fund Social Security and Medicare. The move is designed to help the cyclical problem of a slow economy by putting more spendable funds in workers’ pockets. But since both Social Security and Medicare face future funding shortfalls, this reduction actually hurts the structural problem faced in the long run by those two programs.

Sometimes it may feel like you just can’t win with the economy. Economic success may be a long way off, but the first step is identifying the problems. You decide if separating cyclical problems from structural problems helps.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective/

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