The real GDP disappointed in the third quarter of this year, supposedly rising an annualized 2.8 percent, which is technically slower than last quarter. It was enough for financial journalists to once again assure the public that all is well and that you should be grateful for the prosperity all around you, even though two-thirds of Americans are living paycheck to paycheck.
You surely share my daily shock at prices these days. I’ve yet to adjust to the new reality in which retail prices are 20–50 percent higher, or more, on everything. The strangest feature is that I no longer know what is a “good price” or a “bad price.”
I had a hem fixed on a pair of pants, and the bill came to $20. I thought: that’s excellent. Then I remembered when I was working in an alterations shop when we charged $3.50 for hemming a pair of pants. So then I thought $20 was terrible. Mentioning this to a friend, he was amazed at the bargain because he had just paid $45 for the same service. So I felt better.
Prices are so unstable now that it’s impossible to know when something is expensive or cheap. Consider something like blueberries. At one store, they were $4.45 which I found outrageous but it was a fancy store. So I went to the discount store and, lo and behold, they were $5.00. The lesson is that we can no longer know for sure that this store or that will have the better prices, and quite often we have no real experience to guide us.
Back to the GDP: these figures are always reported in real terms; that is, adjusted for inflation. This does not happen with factory orders or retail sales, which are always reported in nominal terms. That’s very odd. It means that when prices go up, the data reporting renders this as higher sales, which is supposedly good. In actual fact, it is just inflation and nothing more.
A further problem is that we don’t actually know for sure what the inflation number is, or even a reasonable approximation of one. The data collectors exclude interest and the actual home prices and the insurance thereof. They simply cannot account for shrinkflation—and you know from experience that everything these days has been magically shrunken from just a few years ago. Nor can the Consumer Price Index (CPI) account for strange added fees.
The plane ticket I’m using today was a bargain but then I realized that under my ticket, I could not bring a carry on. Adding a bag tacked on an additional $40 and choosing any seat other than the worst one was another $28. When the CPI tracks plane fares, it looks only at the basic price and not all the extras you have to add that were never charged in the past.
Suspicions about the CPI grow even when looking at basic industry data over what the agencies are reporting. They are at least one-third higher, whether you look at cars, groceries, or home appliances.
With that mind, it is helpful to look more carefully at the GDP reports. Even the official data reveals unimpressive trends. As for the seesawing pre- and post-lockdown, no one knows the fullness of the damage that did.
The supposed growth in our times is pathetic by any postwar standard. In the 1950s and ‘60s, we had real economic growth at three times this level, which makes absolutely no sense given the technological innovation of our time. We should be seeing explosive economic growth!
Even the tepid growth of our time disappears when using a more realistic estimate of inflation. But I’m also curious about another possible adjustment: removing government spending as an indicator of economic growth. In the latest report, government spending emerges as a huge contributor. Government is growing at twice the rate as the private sector, bringing us slow-motion socialism that will prove unsustainable.
It should be obvious to anyone that government spending is not real economic growth but rather predatory against growth. We surely know that now, even if briefly in the 1930s, J.M. Keynes convinced the world otherwise. That’s when national income accounting was born and when we started tracking the GDP. The formulas have survived ever since those days, even though hardly anyone defends them.
There is a potential trap here for whomever wins the presidency in the 2024 election. That person will presumably inherit a strong economy that is actually not strong. In fact it is weakening. That could be made more obvious in the coming year. It is simply a matter of drawing attention to inconvenient facts and making a big deal out of them.
A crash can be as easily manufactured as the supposed economic growth of 2022–24. For the average person to hear that the economy is tanking would not produce shock but relief that finally the national media is acknowledging what everyone knows. The then-current occupant of the White House will then catch the blame.
There is also an emergent problem of a second wave of inflation. The data accumulated in real time from Truflation has flipped from between trend to above trend, and the trajectory does not look good.
In addition, the Fed’s shift from trying to crush inflation to preventing recession has effectively meant another round of quantitative easing. In the last year, the banking system has added fully $1.1 trillion to the U.S. money stock. The usual lag time between money expansion and inflationary effects on general prices is 12–18 months. That estimate has been reinforced in the last four years. It is bankable.
If this is correct, and there are not mitigating factors that change the outcome, we could see another round of inflation hit the U.S. economy in the summer of 2025. If this happens, it could be a major problem for the new administration that will have promised to control inflation. There is no practical way that the U.S. president has within his or her power to cause inflation to go away. Whatever each says on the campaign trail, that is the bitter reality.
To be sure, there are ways to fight against inflation in the future simply by controlling the Fed’s policy-making machinery. But the benefits of doing that do not show up for another year or more. There are also tools of industrial deregulation and fiscal policy that can make a difference. Elon’s plan to cut $2 trillion from the federal budget and stop the flow of red ink will surely help the inflation problem. What will not work, however, are price controls of any sort, not even those laundered as “anti-gouging” measures. Any attempts to impose price controls will produce a market disaster and be an extremely bearish sign.
There remains tremendous potential in the U.S. economy for huge growth but inspiring and building this will require dramatic structural change in many areas. It will require bold leadership and tough decisions. Are we up for that? Time will tell.