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GDP rises 3.3% in 4th Quarter. How did that happen? (Vol. 141)

Is this just a 'sugar high'?

Let me explain.

This economic growth is a solid number, and the average for last year was 2.5%, pretty good when almost all ‘econo-misses' had projected a recession as a result of rapidly rising interest rates.  The rise in interest rates, coupled with a declining money supply,  was intended to slow down the economy and reduce inflation.  Those actions would normally mean a decrease in aggregate demand and  output - a recession.  That did not happen - at least not yet.  So what gives, how do we explain this? 

The secret sauce is cooked up by the federal government, I believe.  There has been federal spending at increasing rates, which of course, is fueled by extraordinary deficits and additional huge debts to finance the deficit.  The government is pumping in the fuel and increasing demand (consumption), which has spurred growth in GDP.  But what is it spending it on?

Government.  Government, as you know, does not produce goods and services for consumption, it is the non-productive part of the economy.  So output capacity (through private investments) is not growing - the government is.  And that does not improve our real capacity to produce, but it does put spending money in the hands of consumers so they can buy more and with some slack in the economy, output grows.  Hence there is growth in GDP but limited real growth in capacity to produce goods and services.  There is real growth when productive capacity is expanded, not when we utilize unused capacity as a result of growing government expenditures which pumps up consumer demand.  

The chart below shows where the expenditures are coming from - government spending.  And the growth in employment has been heavily weighted toward government employees - the fastest growing part of the growing workforce.  So our politicians spend a lot, over $6 trillion dollars that is well above our revenues and caused a $2 trillion dollar deficit for fiscal year 2023, and the need to  borrow trillions of dollars to pay for it. 

Spend a lot on the government, increase deficits, borrow a lot of money, spend, deficits, borrow, repeat again and again.  Growing government and spending ourselves into bankruptcy is not the ticket to long term success. That is not the way to improve our well-being as a country.  And if we continue to borrow endlessly, the day of reckoning will come when no one will buy our debt, and that will be a major disaster.  We would be bankrupt.  

So how do we break out of this vicious cycle?  We could increase taxes on everyone or we could just  ‘tax the rich’.  That sounds good to a lot of people.  There is one problem with that, there isn't enough money there to pay for all these deficits and economically, it is a terrible plan to grow an economy.  As Churchill once said, "A nation trying to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle"And we already know what happens when we raise taxes, the government spends it and more.

If you want factual data on this, please see the excellent analysis by Dan Mitchell.  It proves the point that Friedman was making.


What we are seeing (and politicians all congratulating themselves for) is nothing but a ‘Sugar High’.  We do get this temporary growth by growing the government, but it does not increase our economic capacity to produce through savings and investment.  Further, excessive government spending causes massive deficits and debts which are nothing but trouble down the road  (with attendant extraordinary interest costs).  Raising taxes on everyone isn't the answer, nor is taxing the rich, neither works to improve our standard of  living.  What higher taxes do is expand government and slow the growth of our economy.  

The simple answer is to cut spending and control the deficits, eventually balancing the budget.  While it seems self-evident and simple, it has proven, so far, to be impossible to do - I refer you to the Friedman quote above.  But it is a reality we must address if we want to avert the bankruptcy of Uncle Sam and get on a sound economic footing which will grow the real output and improve everyone’s standard of living.


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