How to explain our economic problems to a teenager
First, let me start by saying that I hate it when people try to simplify a complex problem. Details matter. But the political debate about our economy has been so obfuscated by politicians that I find it necessary to go back to basics:
Why are we in an economic downturn?
My goal is to explain our issues in as simple terms as possible. So here goes nothing.
1. In the 90’s and early 00’s, millions of people borrowed money they didn’t have to buy houses that were overvalued.
People were able to get mortgages that they couldn’t afford. Real estate prices were artificially pushed up by speculators - meaning people were borrowing money to buy houses that were overpriced.
Simply put, tons of Americans made bad investments and lost huge %’s of their net worth when the real estate market crashed.
2. When these people realized they had lost tons of money, they stopped buying things.
Consumer demand for things that businesses make collapses.
3. When businesses realized demand for their products fell, they had to cut costs since they were no longer growing. So they fired people and stopped hiring.
With smaller demand for their products, businesses were no longer growing. Without growth, they can’t afford to keep the people they have on staff. So they fire people and don’t hire any new employees.
Unemployment rises.
Now the fun part.
An economy is like a drug addict. Each problem leads to another problem (and so on) and things get worse and worse. It doesn’t heal itself. So what happened next?
4. With higher unemployment, consumer demand fell even further.
People lost their jobs. Other people feared losing their jobs. Everyone starts to save their money instead of spend their money.
5. Businesses are hit with even worse consumer demand. They continue to cut costs and stop hiring.
………..
I don’t think I need to explain what happens next. This isn’t rocket science, this is basic economics. It’s happened before, it will happen again.
Yes, there are other factors that have hurt the economy as well. But almost all of our problems stem from the 5 steps above. Anything else is small potatoes.
What didn’t cause our current economic problems? The US long term debt situation. More on that at a later date.
Right now the problem we have is that 90% of people do not understand that a lack of consumer demand is the problem we’re facing today. I believe even most politicians do not understand these facts. Any debate about “how to fix our economy” should start with the basic information about what’s actually wrong.
Why are we in an economic downturn?
My goal is to explain our issues in as simple terms as possible. So here goes nothing.
1. In the 90’s and early 00’s, millions of people borrowed money they didn’t have to buy houses that were overvalued.
People were able to get mortgages that they couldn’t afford. Real estate prices were artificially pushed up by speculators - meaning people were borrowing money to buy houses that were overpriced.
Simply put, tons of Americans made bad investments and lost huge %’s of their net worth when the real estate market crashed.
2. When these people realized they had lost tons of money, they stopped buying things.
Consumer demand for things that businesses make collapses.
3. When businesses realized demand for their products fell, they had to cut costs since they were no longer growing. So they fired people and stopped hiring.
With smaller demand for their products, businesses were no longer growing. Without growth, they can’t afford to keep the people they have on staff. So they fire people and don’t hire any new employees.
Unemployment rises.
Now the fun part.
An economy is like a drug addict. Each problem leads to another problem (and so on) and things get worse and worse. It doesn’t heal itself. So what happened next?
4. With higher unemployment, consumer demand fell even further.
People lost their jobs. Other people feared losing their jobs. Everyone starts to save their money instead of spend their money.
5. Businesses are hit with even worse consumer demand. They continue to cut costs and stop hiring.
………..
I don’t think I need to explain what happens next. This isn’t rocket science, this is basic economics. It’s happened before, it will happen again.
Yes, there are other factors that have hurt the economy as well. But almost all of our problems stem from the 5 steps above. Anything else is small potatoes.
What didn’t cause our current economic problems? The US long term debt situation. More on that at a later date.
Right now the problem we have is that 90% of people do not understand that a lack of consumer demand is the problem we’re facing today. I believe even most politicians do not understand these facts. Any debate about “how to fix our economy” should start with the basic information about what’s actually wrong.
