Are there easy answers to hard questions?
Published June 29, 2023
Each year I do scores of presentations to a variety of groups. In the post-Covid world, these talks are now a combination of in-person and virtual.
In my talks I try to include topics people are concerned about. Recently that’s been easy, as almost everyone is worried about inflation, a possible recession, finding jobs, and hiring workers.
I always save time at the end of my presentations for Q&A (questions and answers) with the participants. I enjoy this time not only for the interaction with participants, but because their questions give me an added indicator of what’s important to them.
In today’s column I’ll share some of my recent Q&A sessions. It will be interesting for you to decide if your top economic questions line up with those from your neighbors from across North Carolina.
Question 1: I hear Social Security is having financial problems. Will Social Security still exist when I retire? Walden Answer: The latest report from the Social Security Administration says the system won’t have enough funds in 2033 to pay what was promised to retirees. Retirees will still get checks, but they will only be 77% of what was initially stated. My expectation is a national commission will be established before this happens – maybe around 2030 – to create a solution. But there will be some unpopular parts to the solution – like higher taxes and delayed retirements – which is why it will be a “last minute” event.
Question 2: Are we running out of workers? Walden Answer: The decline in birth rates is certainly causing a drop in people being added to the workforce. However, there are three alternatives that could prevent a labor shortage. First is immigration. Almost two out of ten workers today are foreign-born, the highest this century. Second is technology that replaces humans for some kinds of work. The latest version of this is AI, or artificial intelligence. The third is increasing the productivity of the workforce, meaning workers are able to do more in a given period of time.
Question 3: Why can’t we make everything we need in the US? Walden Answer: We are a country rich in resources and talent. Probably more than almost any other country, we could be self-sufficient. The motivation for buying from other countries is cost – other countries may be able to make a product with less cost and therefore sell it to us at a lower price. Hence, we may have to pay higher prices for some products if we became totally self-sufficient.
Question 4: Should we believe the government’s inflation numbers? Walden Answer: I think we should. The federal government has a large and sophisticated process of gathering price data for thousands of products and services and comparing changes over time. They do make adjustments for quality changes. For example, if vehicles have new technology that makes them safer and more efficient, the government will not count any price increase associated with the technology. Also, when aggregating the price changes to create the overall inflation rate, the individual price changes are first weighted by their relative importance in the average person’s budget. One point of confusion is over the special inflation rate that excludes food and energy prices. This is not the official inflation rate; the official inflation rate includes all prices.
Question 5: How can we prevent greed from raising prices? Walden Answer: In our economic system, with some exceptions, businesses are free to set the prices for their products and services. Holding their costs constant, a higher price gives a business a higher profit. But several factors restrain price hikes. One is customer relations. Since customers don’t like higher prices unless they’re getting better quality, they’ll look for sellers with a lower price. Therefore, the second factor restraining price increases is competition. The ability of customers to “take their business elsewhere” is essential to keeping prices in line with costs. Of course, businesses could get together – collude – and agree to charge the same higher prices. But for over a century, this has been illegal in the US. Lastly, innovation has an important part in restraining greed. An inventive person watching consumers complain about high prices for a product will be motivated to develop an alternative product that’s just as good, but cheaper.
Question 6: Is the “American Dream” still alive? Walden Answer: This is a difficult question to answer because each person’s definition of the American Dream can be different. However, recognizing that I’m skipping many details, numerous economists who have researched this topic suggest living standards have trended upward in the country. Poverty rates have dropped, and inflation-adjusted incomes have risen. Certainly, there can be bumps in the road, such as when we have recessions, but the trend has been upward. Still, recognize that not everyone’s upward income trend has been the same. Especially in the 21st century, richer households have seen faster income gains than other households. But interestingly, in the last three years spanning the Covid emergency, inequality in income gains narrowed.
Question 7: How Can We Control the National Debt? Walden Answer: I’d start by reforming the federal budgetary system, making it more like the system used by states and businesses. There would be two budgets. One would be the “current account budget,” which is for day-to-day spending. No borrowing would be allowed for this budget. The second budget would be the “capital account budget,” which is for big-ticket, long-lasting spending, like infrastructure and equipment. Borrowing would be allowed for the capital budget.
This is just a sampling of many Q&A’s. Are they good questions? And, have I given good answers? You decide.
Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.