What is “the Economy,” Anyway?

Earlier this morning, the Bureau of Labor Statistics published a bunch of figures, which collectively is known as the jobs report. The consensus around the numbers seems to be that the news is ‘positive’ for the economy. Hooray! Within the last hour, the Dow Jones Industrial Average broke 14,000 for the first time in almost 6 years. Hooray again! After hearing about these two bits of news, I went on a bit of a rant on Twitter about “the economy.”

At times, this can be a bit bothering — listening to someone opine about the economy when they’re not really specifically pointing to the part of the economy that’s disturbing to them. Part of me wonders if this is because the person doesn’t know what they’re talking about and they’re just repeating the headlines they’ve read in the paper that day or something they heard the newsman say on TV).

The economy is vast — really vast. Let’s just look at the definition on Wikipedia for a moment:

An economy consists of the economic system of a country or other area; the laborcapital, and land resources; and the manufacturingproductiontradedistribution, and consumption ofgoods and services of that area.

Labor, capital, land resources, manufacturing, production, trade, distribution, and consumption — that’s a lot of areas rolled into one! My guess is that when most people talk about the economy, they’re usually referring to that first part: labor. Their perspective on the economy is viewed through the lens of “do I have a job, do my friends have jobs, do other people have jobs, etc.” In this way, when unemployment is high, the economy is “down” or not doing so well.

The ironic part here is that today, with unemployment at 7.9%, the economy could be seen as doing quite well. I mentioned in the tweets above (and earlier in the post) that the Dow broke the 14,000 barrier for the first time in nearly 6 years. That’s pretty substantial as many other folks use the Dow as a proxy for how the economy is doing. “Is the stock market up, then the economy must be doing well…”

Just like unemployment is one facet of the “labor” area of the economy, the stock market could be seen as one facet of the “capital” area of the economy. Another important facet of the “capital” area of the economy: liquidity (cash).

A couple of days ago, Ezra Klein at the Washington Post had an important graph showing the rise in liquid assets over the last 20 years or so. The chart shows a steady (and quick!) rise in liquidity. In fact, liquidity has nearly tripled in the last 20 years! Why does this matter? Well, all that cash on the balance sheet of corporation’s doesn’t do any good for “the economy” nor does it do any good for the unemployment number of 7.9%. If it were up to me, I think that Congress needs to do something to incentivize the corporations for spending all that cash, which represents 11.3% of GDP! While I understand the Keynesian argument for stimulus spending, to me, it appears that coaxing all of that money back into the economy would be the most effective form of stimulus.

~

While it may seem that I’ve gone off on a bit of a tangent, I just wanted to illustrate that “the economy” can represent a number of things to a number of people. The next time you hear someone talking to you about the economy, double-check with them the part of the economy they’re referencing.

About these ads

2 responses to “What is “the Economy,” Anyway?

  1. Pingback: If You Want a Successful and Sustainable Company, Focus on the Workforce | Jeremiah Stanghini

  2. Pingback: How Does “the Economy” Work, Anyway? | Jeremiah Stanghini

Any Thoughts?

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s