Transcript Cyclical versus Structural Economic Issues

Structural vs. Cyclical
Economic Challenges
Cyclical vs. Structural
• Cyclical Problems – are related to the business cycle:
Economy falls
into a recession
5% of Autoworkers
Lose jobs
Economy recovers =>
All Autoworkers are rehired
==================================================================
• Structural Problems – a fundamental change has occurred
Toll Booth
Collectors jobs
are automated
Jobs do not come back!
Workers have outdated skills
This is structural unemployment
Without retraining => workers remain unemployed!
Fixing Structural Problems
Peak
Peak
Cyclical problems “fix” themselves
At peak of business cycle they are fixed
Trough
Structural problems need “structural” solutions. At peak of business cycle
they still exist without fundamental (policy) change
2-Types of Deficits
Cyclical deficit: Portion of deficit attributable
to a slowdown in the business cycle
(during recession)
Structural deficit: occurs with the economy
at full potential output (peak of business cycle, high GDP)
Structural Deficits do not go away when the economy improves
unless structural changes are made
US Demographics
• America’s population is aging
– By 2040 1 in 4 Americans will be over 65
• Entitlement spending is a structural economic problem
• The ratio of workers to retirees is falling
– This means less money coming in => more going out
Balancing the Budget?
“The only real question” is whether adjustments to taxes and spending
will come from a “careful and deliberative process” or from a “rapid
and painful response to a looming or actual fiscal crisis,”
Ben Bernanke
2010
Government Spending
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Social Security
Medicare
Medicaid
Interest on Debt
Defense Spending
Homeland Security
Education
Other
Total
22.0%
14.0%
7.0%
6.0%
18.0%
1.0%
2.0%
26.0
100.0%
46% of Budget
24% of Budget
Growth of Entitlements
1964
.
27%
30%
33%
.
1984
2004*
20%
33%
46%
21%
7%
13%
14%
21%
9%
Defense
Social Security
Net interest
All other spending
*Current services estimate.
Source: Budget of the United States Government, FY 2005, Office of Management and Budget.
7%
19%
Medicare & Medicaid
Changing Entitlements
Social Security, Medicare & Medicaid
Social Security
Medicare
$470 Billion spent per year
$50 Billion stolen?