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Hello and welcome to another episode of the Minor Issues Podcast.
I'm Mark Thornton at the Mises Institute.
Well, it is looking increasingly unlikely that my prediction for an official recession
beginning in late 2024 will materialize.
Of course, we won't know for another six months the normal delay of the NBER dating committee.
President Trump's victory has had some immediate positive effects on the economy.
Stocks are up, gold is down, and the vital small capitalization stocks are also up big.
Now, this is surely the result of many factors.
One, just having the election over with and all the uncertainty that that brings.
Two, having a clear winner in the contest with no lingering disputes.
And three, Trump is a pro-business and pro-growth president.
We've had a good unemployment report and new job openings in the economy were up
rather than continuing down.
And there is a fair share of really good jobs in those new openings.
So it would appear that there was some pent-up demand to expand businesses
that President Trump's victory has unleashed.
Over this past year, we have looked at many factors that have kept the expansion going
in stocks moving higher, mainly monetary policy.
But here we look at the impact of fiscal policy or government spending on GDP or gross
domestic product, a measure of the overall economic activity in the economy,
which is related to, of course, employment and stock prices.
Fiscal following.
What I hope to explain is that increased government spending not only explains
ongoing wayward increases in GDP, employment, and stock price numbers,
but why also many people decided to vote against the incumbent,
President Biden and Vice President Harris, in favor of the challenge or Donald Trump,
normally incumbents that preside over an economic expansion get re-elected,
whether they deserve it or not.
The key variable is that government spending in GDP statistics
may not reflect true economic value the way your own personal spending does.
The big expansion of government spending,
beyond the regular trend line in the economy,
included the COVID response period, but also afterwards it included one,
the American Rescue Plan, two, the Bipartisan Infrastructure Law,
three, the Chips in Science Act, and four, the Inflation Reduction Act.
Now, these policies released trillions of spending and borrowed money
that saw the national debt of the government explode upwards.
If we look at the thread graph that shows federal government current expenditures,
we can see that the previous trend line to the left,
followed by the double peak expansion of COVID-related spending,
and then to the right, we see a return to a new trend line.
Notice that after the double peak, the trend line is both at a higher level
and a higher rate of increase over time.
So from the fourth quarter of 2019, which was before COVID on the old trend line,
to the third quarter of 2024 on the new trend line,
the level of GDP increased by $7.4 trillion, or 33.8 percent.
Now, over that same time period, federal spending increased by 2.26 trillion, or 47 percent.
Increased federal spending dollars directly accounted for over 30 percent of the increased
GDP dollars at the Q3 2024 levels, the last quarter we have statistics for.
Now, this might suggest that the critics were right.
In particular, the infrastructure, chips, and inflation reduction acts
were criticized as unnecessary, ineffective, and misdirected spending.
They could also be criticized for putting large sums of money
into the pockets of a narrow, politically favored constituency.
Critics further argued that the spending did not increase the economy's productive capacity
and might have actually harmed it, even with the subsidies to the private sector,
and yet it added mightily to the national debt.
Now, this brings us to a critical point that's emphasized by Austrian economists.
Government spending dollars added to GDP statistics are not the same thing
as shoes and stakes and razor blades that are produced in the private sector and then valued
by consumer dollars at the checkout counter. Government spending might not be worth anything
at all. It can't even be negative or downright destructive to human flourishing.
It is possible that people put some value on government spending, but not in the relevant
manner of voluntarily paying for it. Now, Doge ought to earnestly consider this last point.
Most government spending contributes nothing to the economic value and nothing to the productive
capacity or efficiency of the U.S. economic system. Most government programs contribute nothing
positive and just generate paychecks in higher employment and higher GDP numbers.
In fact, most government programs are downright drags on economic performance in our standard of living.