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Does the Economy Affect Me?

Does the overall economy really affect you? This is a question one must ask as many Americans are making the argument that the government should stay out of the way of financial and real estate markets. As well, they are making the argument that government should stay out of the way of the economy. So how does the economy affect you and should government stay out?

The Economy

The economy is simply a series of markets that work together to give an overall economic picture. Think of it as a puzzle. Each piece of a puzzle is its own piece, however when you put all the pieces together you get a picture. This is how the economy essentially works. The challenge with the economy is that while you are putting the puzzle together some of the pieces of the puzzle can change shape which will cause a change in the “economic picture.” This is why it is difficult to determine exactly what the economic picture is on any given day. We only arrive at a clear picture when we look at historical data over several months.

Key Drivers of the Economy

The economy has several key drivers or players within its complex system. One of the main players that can affect the economy is government. By increasing spending, government can stimulate the economy. This is necessary during periods of economic slow down. Consumers are also an active player in the economy. If consumers spend more money, then they can cause the economy to expand. In addition, businesses play a similar role to consumers; in that if businesses spend more money to meet consumer demand for goods and services, then the economy can expand. Perhaps the biggest part of the economy that everyone pays attention to is how many or few jobs the economy generates. Arguably the biggest player in the economy is human emotions. That’s right human emotions. Human emotions drive expectations of what will happen in the economy which ultimately drives people’s behaviors, which ultimately drive the economy up or down. Now there are several other factors that affect the economy but, for the sake of this post I will only mention these few.

How the Economy Affects You

Employment is probably one of the biggest factors of the economy that affect you. By looking at the biggest factor that most consumers pay attention to, we can see how the economy affects you. For example, if your city is experiencing high unemployment then you can bet that real estate sales will slow, or even worse, real estate prices could begin to fall. This is why a recession is so dangerous. Because they are usually marked by a time of high unemployment. The flip side is if an economy is booming people have more money to spend and purchase more goods and services. This causes businesses to expand their production which increases employment and household income. In other words people feel richer. It is important to note that people may not be richer but their expectations are positive toward the economy and this is driving their behavior which ultimately affects them and the economy.

The Importance of Government in the Economy

So as we can see, you and the economy are closely intertwined. You affect it and it reflects you. Now let us turn and take a look at the role of the government in the economy.
During times of economic prosperity the government’s role in the economy is not needed. The only role government should play is to utilize monetary policy to make sure the economy does not over heat. To better understand how this works think of a car. You want the car to run well and be able to go fast; however, if you go too fast the engine will over heat. So if our economy is fast we need to slow it down so that it does not over heat. However, during time of an economic slow down, the government should and must play a critical role of stimulating the economy. The government can stimulate the economy in two ways; through fiscal and monetary policy. Fiscal policy is actions taken by congress, and monetary policy is actions taken by the Federal Reserve.

Yes, the economy does directly affect you. In addition, it affects you to such an extent that during economic slowdowns, the government responds and gets involved in stimulating the economy. However, perhaps the most interesting part of the economy is that you affect it and it reflects your expectations and emotions toward the future.

Cliff Pape
Home Buddies