What makes an economy objectively “good”? People seem to complain about the economy being “bad” all the time but who/what determines if it’s truly “good” or “bad”?
In: Economics
things that make an economy good
* people have jobs
* people think it would be easy to find another job if needed or wanted
* cost of goods and services are relatively cheap to income
* inflation is low
* wages are rising
* debt is low
* debt is cheap
its very easy to quantify a bad economy; and bad news sells. no one wants to hear how good things are or how lucky they are
An economy is so complex, it’s hard to say… and in almost any case, there will be those people/jobs/regions doing well and others not doing well. But in general, there are some key economic stats that are looked at:
– GDP (gross domestic product) is the combined value of everything produced. We want to see year-over-year growth in this. Two quarters of negative GDP growth means a recession.
– Unemployment rate is percentage of people working or looking for work who are employed. 5% unemployment is considered “full employment” as there are always people entering workforce, quitting jobs, etc. Currently, unemployment is around 4% meaning it’s hard for employers to find and hire enough workers.
– Stock market indexes like Dow Jones Industrial Average, NASDAQ, S&P500.
– Inflation rate. We want to see a little inflation, around 2%. Much higher and that can be bad.
At the very core, the difference between a good economy and a bad economy is money movement.
If people are earning money and spending money, your economy is good. If people are scared to spend money, then it’ll be bad.
Interest rates, inflation, taxes, etc. All these are just ways too incentivize people to spend money.
Well, in general an economy has so many subsystems that we must talk about averages here. Just because the overall economy is doing bad doesn’t mean there can be certain fields of business that do really well.
In general good economy means companies are growing, hiring people, making profits and can pay taxes on it. If that’s the case then things get easier for everyone involved basically (company, employees, government).
A bad economy is the opposite. Companies can’t sell all their product, so they are forced to downsize, fire people, make losses and therefore can’t pay taxes on profits. That’s bad for everyone.
Both of these states *tend* to amplify itself. Because a company that does well can pay higher wages, wich allows people to spend more money on things wich leads to even more demand/profits and vice versa.
Now the difficult part: how to measure in wich part we are? Well, there actually is no single objective measure that covers everything. There are many actors, and you can’t directly compare how well they are doing with each other. So there are lots of cases where the economy is neither objectively good or objectively bad for everyone. This is also very political, so many people will say things in order to influence policy “we’re doing badly please give us tax cuts to stimulate business!”.
One thing to look at is economic growth (GDP). How much companies grow in revenue overall gives a measure. If it grows fast that’s a clear sign economy is doing fine. But there is no magic number from where it’s considered good/bad, it’s a spectrum. Another thing is employment percentage, or purchase power of consumers, or inflation rate. But each of these numbers has the problem of only evaluating one aspect of the overall economy, and there are no generally agreed upon numbers of what is good and what isn’t
The base principle is activity, if an economy is highly active that means lots of people are trading and therefore accessing wealth. If it slows down that implies some section of the population is not able to trade, implying that they are unable to access goods and services that facilitate and enrich their life.
An economy can still be highly active while some people are still unable to trade, so you can have a strong economy while still lacking equality or good living conditions for some section of the population, which is why it should always be examined in tandem with other metrics like food access and quality of living across the board.
There will always be people who are having a good time and a bad time given any state of the economy. A “good” economy could be seen as a healthy balance somewhere in the middle.
People have enough money to buy what the need, but not so much money that prices get driven up.
There are jobs available to people to find work, but not so many jobs available that companies are understaffed.
Interest rates are high enough that people are encouraged to invest, but not so high that loans (which includes buying a home) are unaffordable.
Economic growth phase is generally considered good, life is easy, life in nice, everyone has money up to eyebrows, there are jobs enough for everyone, companies grow like mushrooms after rain etc.
However… there is a quote that applies here, “Hard times create strong men, strong men create good times, good times create weak men, and weak men create hard times”
When times are good, any sensible company focuses of growth above all else. Most relevantly, growth above efficiency. Why bother with difficult penny pinching when easy expansion can bring in way more money than you could ever save? But those small inefficiencies pile up, on level of individual companies and on level of the entire economy because everyone behaves the same.
And sooner or later, those inefficiencies start costing so much that the economic growth stalls and contraction starts. That is generally considered as bad economy. There is not enough money to go around, life is hard, many companies go bankrupt, people lose jobs etc.
But, who is thrown under the bus first? Where ever the money runs out fastest, the most inefficient companies go under first, the least necessary employees lose their jobs first. There is no growth to be had, so companies focus on improving efficiency. Which sets conditions up for another round of growth and the cycle repeats. That is why economy is cyclic.
People earning enough to pay for housing+food and have money left over for entertainment+hobbies = economy good
People not earning enough to pay for housing+food and don’t have money left over for entertainment+hobbies = economy bad
As other people have said, there are lots of different objective measures that can be used to determine whether an economy is good or bad.
But ultimately “good” and “bad” are subjective.
It depends on what you value, it depends on where you draw the line. What matters to you? How well-off the poorest in society are? Your country’s economic power against others? Should you benchmark your economy against its peers, against past performance, against other goals you’ve set?
Almost every measure people are talking about are just means to an end.
An economy is “good” if:
* 99+% of your population can achieve material security, as in their have the means to reliably and confidently have housing and clothing and food and transportation and access to basic medical care.
* 80%+ of your population is able to achieve moderate material prosperity, as in they are able to have a nice house and nice clothes and a nice car and own some luxuries and take the occasional vacation.
* 20% or so of your population is able to achieve wealth, as in they can afford a higher end lifestyle, engage in greater amounts of conspicuous consumption, have enough wealth to themselves become investors or economic resources for others in their community.
* 5% or so of your population is able to become quite wealthy.
While not necessary, greater stability will be achieved if those last two tiers are not tied or titles or inherited positions, but rather are accessible, at least in theory, to anyone.
The reason I say all of this is because what makes an economy “good” is it’s institutional stability. If your economy goes gang busters and generates extreme wealth, but does so at the cost of extreme social inequity and domestic unrest leading to rebellion and collapse, then it wasn’t a “good” economy really, even if a snap shot of the performance just before that collapse makes it seem that way.
A “good” economy is one that provides the necessary wealth and prosperity to maintain domestic tranquility among the population, or at least have economic stratification and material anxiety not be the source of unrest if unrest is present. But of course nothing lasts forever, all empires eventually fall, so we can gauge a “good” economy as the one that does the best job at that goal for the longest period.
This is something a lot of people miss when we talk about wealth inequality. Yes there is a moral component, but there is also a practical component. Wealth inequity can only go so far, the bulk of the people can only endure so much material anxiety, before they storm the bastille and start beheading aristocrats. That’s just the natural course. It is in everyone’s best interest to allow for a healthy, broad, and secure middle class for the majority of the population, and at least a safety net of material security for the poor. It makes for a better society in every possible way.
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