The Retirement Corporation of America

Why Your Role In The Economy Is Crucial

Want to know who makes the economy do what it does? It isn't the giant global banks or the multi-billion-dollar multinational corporations. It isn't the U.S. Treasury which collects and spends all the money for Uncle Sam. It isn't the Federal Reserve which is the only entity in the whole country that has the power to create money out of thin air.

When it comes to who has the most economic muscle, the answer is--you!

The U.S. economy is gigantic--easily the biggest in the world. How big? The basic measurement is Gross Domestic Product or GDP. Put most simply, it measures how much gets spent each year in our economy. At the moment, our Gross Domestic Product--all that spending put together--comes to about $10 trillion.

It won't stay at $10 trillion for very long, though, since our economy keeps growing at an average 3% a year. By the time you read this lesson, all that spending lumped together could be closer to $11 trillion. By the time you are ready to retire, it could easily be $20 trillion.

As recently as 1970, GDP for the whole U.S. economy was just $1 trillion. When the Great Depression began in 1929, it was only $100 billion. Not only are we the biggest economy in the world, but in recent years that growth rate has been speeding up.

Who Does All That Spending?

So a lot of spending gets done in our economy--but who does it all? And where does your spending figure into GDP? We've already told you that you swing the big stick in our economy. That you have the most economic muscle. But what does that mean?

Obviously Uncle Sam is a pretty big-time spender, as you'd expect. These days, the government spends about $1.8 trillion a year.

Businesses also spend a lot--another $1.7 trillion a year.

But when it comes to big-time spending, you and all the other consumers in America are the heavyweights. Total spending by all American consumers put together comes to about $7 trillion a year. That's an awful lot of money.

The Crucial Role You Play

Since you spend the most, that means you play a crucial role in how well--or how poorly--our economy performs. Here's how that works:

Scenario #1: You're feeling good. Maybe you got a new job or you got a raise or your spouse went back to work. Whatever the reason, you're feeling flush, so you spend more. You buy a new car and a bigger TV and maybe some new clothes.

Result. Spending by you and everyone else who feels good boosts demand for everything from cars to clothing. Car companies and clothing manufacturers hire more workers to help meet the demand. Those new workers can afford to spend more, so demand increases further. There's new momentum behind the economy and economic growth speeds up. Times are good, and you played an important role in making those good times happen.

Scenario #2: You're feeling glum. Maybe you lost a job or overtime got cut back. Maybe your spouse lost a job. Whatever the reason, you're feeling a little short just now, so you spend less. You keep the old car for another year and decide you can live with your present TV. You and your spouse decide to wear last year's wardrobe for another year.

Result. Spending by you and everyone else who feels glum cuts demand for everything from cars to clothing. Car companies and clothing manufacturers quit hiring new workers and actually lay a few workers off. Momentum behind the economy fades and economic growth slows. Times aren't so good, and you played an important role in making the economy sluggish.

It's not that simple, of course. Lots of other factors influence the vim and vigor of the economy.

Take inflation, for instance:

•  If inflation slows, each dollar goes further and you can buy more goods and services. Low inflation is good for the economy.

•  If inflation picks up, each dollar buys less and you don't get to buy everything you would like to. High inflation is bad for the economy.

Or take interest rates:

•  If rates come down, there's more incentive to borrow to buy a home or car and less incentive to keep your money in the bank. Lower interest rates are good for the economy.

•  If rates go up, there's no incentive to borrow to buy a home or car--and more incentive to keep your money in the bank. Higher rates are bad for the economy.

Or take taxes:

•  If Congress raises taxes, there's more for Uncle Sam but less for you to spend. High taxes tend to slow the economy.

•  If Congress cuts taxes, there's more money just burning a hole in your pocket waiting to be spent. Low taxes tend to speed up the economy.

So lots of factors affect the way you spend your money. The bottom line is this: You're always at the heart of what is making the economy tick at any given moment. To see who moves the economy, look in the mirror. To understand what happens to the economy next, the best person to ask is you.