A deeper look at the US economy

By Sepehr Achard | 5th December 2019

Ever since the start of globalisation, America has always been a force to be reckoned with. Based on aggregated economic indicators, it is currently a top performer: their annual GDP growth rate is sustainable at 2.1% with low inflation as well as healthy unemployment levels. However, there are many factors that these results fail to indicate. Is the nation sustainable in the long run? Can it still be considered a developed economy?

Social inequality has always been an issue in the US, but it has increased in severity under Trump’s rule. According to the World Bank, the USA’s Gini coefficient (a measurement of national income inequality) reached 0.49 in 2018, unprecedented for a developed economy which usually sits around 0.3.

This trend can be explained by a number of factors:

The global increase in technological advancements has enabled companies to achieve new levels of efficiency, typically causing increased unemployment in low skilled industries as they take advantage of decreased costs. In these instances, an increase in income disparity amongst social classes can be seen. The profits of these companies would increase, most likely leading to higher bonuses for their directors and senior management whilst the newly unemployed suffer from no income. These situations are not helped in the US following Trump’s corporate tax cut to 21% in December 2017.

Furthermore, this trend is likely to continue. According to McKinsey, 65% of the US’s consumable goods are trucked to market. If full autonomy is integrated into the industry, operating costs are estimated to decline by 45%, saving market players between $85 to $125 billion. For consumers, this may be good news, as prices of delivered goods may decrease, but what will happen to the fired truck drivers?

The majority of developed nations have implemented measures to address these issues, however those in the US are faced with more difficulty. There is limited support for the unemployed and, with Trump still advocating to dismantle Obamacare, it is likely this will worsen. These people often need to retrain in order to reintegrate into the job market which, as a result of increased automation, typically offers more highly skilled work. As government support is rarely enough, these people turn to loans to finance not only their studies, but also a basic standard of living.

According to the Financial Times, the average debt per person in the US sits around $38,000. Even with stable employment, this is difficult to repay based on the current US average minimum wage of $7.25 per hour, assuming the earning potential for those in the process of upskilling does not far exceed this rate. Unfortunately, it is that much harder for those of low socio-economic backgrounds to better themselves in America.

Trump is very pleased with himself as he measures his success by looking at US economic performance indicators, but is the disregard of growing social issues going to be his downfall? Furthermore, with an increasing proportion of the population borrowing comes a higher rate of default, are we on the edge of a new crisis?