Economy vs. Fiscal Situation

Economy vs. Fiscal Situation

by Stacy Brasher on Oct 28, 2019

Evidently, in a field like financial services, it matters which words we use as professionals. Occasionally, similar concepts get conflated, confusing the general public. For example, saving and investing are two fundamentally different disciplines with different tools and goals. Despite those differences, it's a common misconception that using relatively riskier retirement investing tools is the same as building safe money savings. By the same token, this confusion also extends to popular impressions of what the "economy" is and what our nation's "fiscal" situation is. What's the difference between the economy and fiscal policy, and why does any of it matter anyway? Whether you're a business owner, a concerned parent, or just an individual who wants a little peace of mind, it's to your benefit to understand them both.

Firstly, I could forgive anyone for being a little fuzzy on the distinctions between the two ideas. They're deeply interrelated, and they influence one another heavily. Be that as it may, equating them would be similar to saying that cats and dogs are the same since they're both common pets. To explain it simply, America's "economic" situation is where our existing wealth, our human capital, and our capacity to produce and export meet. Contrarily, our "fiscal" policy is simply how much revenue our leaders decide to tax and how much of it they intend to spend.

Together, leaders use those data points among many others to learn from the economy of the past, to evaluate our present, and to make decisions for the future. At least that's how it ought to work in theory. In reality, though, we can't take just anyone at their word when they take a bold stance about how well or how poorly the country is doing financially. Whether well-intentioned or deliberately deceptive, just gauging the "economy" without looking critically at the fiscal policy will never give you the full picture. For example, the markets have been on a bull run for the longest period in US history; national employment numbers are some of the best they've ever been; home values have rebounded significantly; consumer spending has been healthy; and we're only just now seeing the hiccups of the business cycle start to raise questions. By anyone's metrics, the economy is doing fairly well. However, the "economy" is just the tip of the iceberg.

The real threat to our ship of state is the rest of that berg below the water—our fiscal policy. Since the early 20th Century, Congress has automated the vast majority of the United States federal budget. The expressed and enumerated functions that they're charged with funding are now only about 30% of our spending. Further, America's debt-to-GDP ratio has ballooned to untenable levels. Our demographic trends are only going to worsen our annual debt that's already topped $1 trillion. Considering what these fiscal statistics say about our future, any rosy economic outlook rings hollow.

It's a hard pill to swallow, but we can only prepare our economy to weather the storm that's brewing in our spending habits by becoming informed. None of the fiscal issues invalidates all of the good news that there is to celebrate economically. Still, we can't ignore that things went off the rails in the budget a long time ago. Our legislators haven't lived up to their oath to lead us responsibly. The other shoe will drop if we don't make fiscal changes sooner rather than later. And when it comes to government revenue, the "other shoe" means higher taxes and less in the way of promised benefits. Now that you understand the differences between the economy and fiscal policy, you can fully understand the consequences we're facing for inaction. The time is now to prepare so that your children, grandchildren, and future generations don't suffer because we failed to act. Let's talk today about how to plan for a financial future that will position your family to find success.

Scott Chapman is the proprietor of Chapman Financial Services and a Financial Advisor with Nowlin & Associates.