In the economy, real economic return on investment is not just an important metric. It is crucial. That is why I find it so intellectually dishonest when some economists look at the GDP and employment growth without putting it in the context of the massive increase in debt, spending, and money supply.
A stimulus plan is supposed to generate higher and faster growth than the normal trend would dictate. Furthermore, the definition of a stimulus plan is that it should improve the long-term trend.
Governments have taken the recommendations of Keynes to spend in recession periods and erased from their memory the need to save and cut taxes in growth times. Keynes opened a dangerous door when he placed government as the solution to crisis and subsequent governments have taken it to the extreme with clear diminishing returns. What we have now is a chain of massive debt and monetary stimuli that are devoted to current and entitlement spending with no real economic return only to increase spending even in growth periods, where government never saves.
It is in the context of the largest fiscal and monetary stimulus in decades that we can and should be extremely concerned about the latest jobs report. In 2021, the United States deficit will surpass the $3 trillion mark and 13.4 percent of GDP, according to the Congressional Budget Office. This will be the largest deficit since 1945 and exceeded only by the spending of 2020. To this, we must add the $80 billion monthly asset purchases of the Federal Reserve. According to neo-Keynesians, such massive government “support” added to the reopening of the economy should accelerate job creation and growth, and increase the long-term GDP growth trend. None of it has happened.
All we see in the United States economy is a direct consequence of the reopening. The economy sank due to the shutdown and recovers due to the opening. The only thing that government and central bank action has achieved in the meantime is to drive inflation and debt higher.
Higher debt and rising inflation are not drivers of longer-term growth and improved productivity trends, rather the opposite.
Imagine that you invest in an economy $6 trillion in 2020 and 2021, and the results are lower job creation while debt rises twice as fast as growth. It is the recipe for disaster.
The September jobs report was extremely disappointing in this context of massive so-called stimulus. Disguising it as “labor shortages” is simply a joke: a dreadful 194,000 jobs gain versus 500,000 expected in nonfarm payrolls in September, with the labor force falling by by 183,000, still 3 million below the prepandemic level. The report showed that the economy has seen a stagnant labor participation rate for eleven months, at 61.6 percent.
In September, the number employed part time for economic reasons, at 4.5 million, was essentially unchanged for a second month in a row. There were 4.4 million in February 2020. These workers, according to the Bureau of Labor Statistics, are part time because their hours had been reduced or they were unable to find full-time jobs.
We can see that these massive trillion-dollar stimulus programs generate a virtually nonexistent long-term positive impact, just a short-term bounce that lasts less than a quarter. We have the GDPNow model estimates from the Atlanta Fed and the St. Louis Fed both coming in at only 1.3 percent growth for 3Q2021. In fact, the Atlanta Fed’s Q3 Nowcast of real GDP has essentially zeroed out any growth while inflation continues to remain elevated at an estimated 4 percent for 2021. Well done, Keynesians.
Author: Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020),Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and Life in the Financial Markets (2014).
He is a professor of global economy at IE Business School in Madrid.
Reprinted with permission of Mises Institute.