Can economic growth continue forever? The sky is falling, the sky is falling. It looks like those who continuously forecast a recession are gaining favor with the television's talking pundits.
To be fair, though, while no one suggests that the business cycle has been repealed, there are those who are taking a more Pollyanna-ish view of the economy. Nonetheless, calling the U.S. economy a sustainable engine of monotonic growth defies most economic theory.
The economy is made up of several sectors, each of which can influence its growth or decline. Two very distinctive areas are the “real” sector and the “monetary” sector. The former is defined as the activity of those who produce goods and provide services, while the latter can be viewed as the lubricant that enables that production to occur.
The “goods” portion refers to manufacturing, agriculture, mining and utilities operations. The “service” portion includes education, health, transportation, government (yes — it can be viewed as a service), retailers, wholesalers, restaurants, and small businesses.
The price we pay for these goods and services depends on supply and demand, as well as how much cash (or near cash) we have on hand. The overall allocation of resources to produce and distribute these goods and services also depends to some extent on the kinds of choices consumers make. Unfortunately, when we have more cash (or access to it), we tend to make imprudent choices.
There are currently some interesting changes in the system that should impact the way we view economic trends. Perhaps the two most important are the worldwide change in sources of supply and demand, and the free flow of capital. It has taken decades for these two to evolve to what they are now. And both offer more benefits, as well as more costs, to a greater portion of the earth's population.
The U.S. economy is supported primarily by the production of goods and services. Without this, we would have a much lower standard of living and we'd have to rely more on our own personal efforts to survive.
While it's true that we could and do provide medical services, education, and financial services for people both at home and abroad, the services sector is still a relatively modest contributor to our economy compared to the goods sector.
The more we turn into a service economy, the more we'll have to rely upon others. Although this reliance on others has created wealth in other areas that help support our economy, the rate of return for our efforts has been declining. History has shown us what this can lead to — world economic leaders turning into nations of accountants or administrators.
What will keep us from falling into that trap? For starters, there are three major barriers: large oceans, significant resources in North America and our ability to innovate.
While the oceans are likely to be there for some time to come, the same cannot be said for our natural resources. We need to preserve them if we want to compete on a world stage.
We also have to ensure that we don't stifle our ability to innovate, something that has been a defining characteristic since our country was founded. If we lose that skill, our ability to produce what we need as a society will diminish, leaving us with an economy that is not in good shape.
At this point in time, our economy is still an engine of growth that's based on the fundamental creation of goods. But if we tip that balance any further, we'll be faced with even more unsettling economic swings.