How Good Is the GDP News?

President Joe Biden speaks to the press as he walks to Marine One prior to departure from the South Lawn of the White House in Washington on Oct. 27, 2022, as he travels to New York, before spending the weekend in Delaware. Saul Loeb/AFP via Getty Images

Commentary

We’d all welcome good economic news. Even better, we’d welcome a healthy economy.

We now have a headline number that seems fine—an inflation-adjusted increase in gross domestic product (GDP) annualized at 2.6 percent. But right now, we’re nowhere near finding our way back to economic health. The worrying signs are everywhere.

The GDP increase is mostly attributable to two factors: an unsustainable increase in exports to Europe (mostly oil) and an increase in government spending. How is the latter supposed to represent economic output? Ask the people who constructed the GDP machinery back in the heyday of Keynesian economics. It should be obvious that an increase in government spending comes at the expense of the private sector. But that’s not reflected in the way the number is constructed.

As a result, and this has been going on for many decades, soaring government spending gets rendered as economic growth, no matter how untrue that claim happens to be.

What’s recovering now isn’t the economy but the government. Federal government expenditures are up 3.7 percent in the third quarter after having fallen for five previous quarters. The reason for the previous falls was related to the explosive growth in the first quarters of 2020 (31.5 percent) and 2021 (17.3 percent). So that fall was inevitable.

Now the trend has reversed. This isn’t good news but bad, regardless of the effect on GDP.

That’s just at the federal level. And much of it is attributed to national “defense” spending, which is up by 4.7 percent. If anyone thinks sending the big bucks to Ukraine is good for the U.S. economy, he should have his head examined. On the state and local level, the trend toward falling government spending is also reversed: now it’s up 2.3 percent.

Take this away and the numbers would be flat to negative.

And so what is down? Gross private fixed investment, you know, the stuff that actually drives real economic growth. It was down in the third quarter by 8.5 percent following another decline in the previous quarter of 14.1 percent. Nonresidential investment structures fell by 15.3 percent. This follows five previous quarters of decline.

The overall picture, then, is grim: growing government spending and declining private investment. That isn’t the basis of prosperity. Just the opposite.

And matters are far worse when you consider household finances. Real disposable income continues to fall due to inflation. Personal savings continues to fall, too. Meanwhile, credit card debt is rising. You can see what’s happening here. People are continuing to hang on to the illusion of prosperity while digging ever deeper into their bank balances. This trend is completely unsustainable.

Investment and saving are the basis of future economic growth. Government spending cannot be a substitute. And yet we have growing government and falling savings and investment with increasing debt. That’s not the same as recession, but it foreshadows a genuine economic mess come later this year and next.

The striking feature of these trends is how they represent a complete reversal of the fakery of 2020–21, when people were briefly led to believe that income and savings were way up while the burden of personal debt was down. Now we see the complete opposite. The fake prosperity melted away in a matter of months.

Data: Federal Reserve Economic Data [FRED], St. Louis Fed; Chart: Jeffrey A. Tucker

What’s the Biden administration doing about it? It has resorted to goofy tricks such as waging war on added fees. Biden actually gave a series of mini-speeches decrying issues such as overdraft fees and upgrades on airlines. What he seems not to get is that these action-based fees represent a way for consumers to avoid the worst effects of inflation.

Actually, private enterprise should be praised for the genius of devolving high costs in ways that allow consumers to opt out. Consider the airline issue. I truly care nothing about having an extra six inches of legroom, so instead, I pay the lower ticket price.

I feel the same about baggage. I travel very light, so I’m happy to pay a lower rate, while others lug around big suitcases and have to pay to do so. This is an ingenious strategy on the part of airlines. But the Biden administration has announced that this is unfair and has to go. All this means is that I’ll now have to pay for someone else’s legroom and suitcases.

Aggregating hidden fees into a single price doesn’t help consumers. It only makes inflation more obvious and costly for everyone.

The same is true for overdraft fees. The best approach isn’t to draw down too deeply on your bank balances. By punishing banks for fees, they’re only being encouraged to build higher costs into service fees for everyone, such that responsible people are forced to foot the bill for deadbeats. In that sense, this is just like student loan forgiveness.

One wonders how the White House came up with this ridiculous tactic. Probably some intern got annoyed at the ticket counter when the attendant charged him an extra $35 to check a bag on a basic economy ticket. This complaint made the rounds at a White House now desperate for something to pitch to the voters, anything to blame private enterprise.

It’s got to be the pettiest form of price control we have yet seen in the postwar period. But it does indicate the willingness of this government to deploy legalized aggression to attack market-based pricing. Price controls have been discredited after long experience but that means nothing to the Biden administration, which is clamoring for any gimmick to make it seem as if it’s doing something about inflation.

Meanwhile, in other favorite industries of the Biden administration, such as Big Tech, matters are looking very grim. Somehow, Mark Zuckerberg believed that everyone in the future would want to strap on a headset and come and live in his goofy cartoon world called the Metaverse. That isn’t working out so well.

The stock for Meta hit single digits yesterday, taking us back seven years. Zuckerberg isn’t likely to bail on his cartoon land anytime soon, no matter how preposterous it is. Meanwhile, we’re awaiting other earnings reports from other tech giants. Bad news here could be another foreshadowing of tough economic times ahead.

The Biden administration can now crow that we’re out of the technical recession. Actually, every recession but one in the postwar period has included at least one quarter of positive real GDP growth. And the administration should be careful about how it goes about its bragging. Everyone is aware of the suffering we’re enduring. An economy can’t run on gaslighting even if the energy source is a wind turbine and solar panels.