3 minute read
Government Intervention
DANIEL LACALLE is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.” Daniel Lacalle
Productive Sector Recession
uantitative easing was designed as a tool to provide time for governments to implement structural reforms, boost growth, and strengthen the economy. However, it has become a tool to increase the size of government and take on increasingly riskier levels of debt.
The U.S. economy hasn’t strengthened in the period of enormous fiscal and monetary stimuli, as the latest data show. It needs increasing units of debt to generate a new unit of gross domestic product (GDP), productivity is extremely poor, and leading indicators are negative.
The main problem of loose monetary policy is that it massively increases the size of government on the way in through debt and deficit spending monetization, but it also expands government on the way out as rate hikes and liquidity constraints affect households and small businesses but deficit spending and rising public debt remain. This “tightening” period is particularly negative in this crowding-out effect because the government is presenting new spending packages every week while the Fed is trying to contain inflation, curbing demand growth. The public sector is unaffected by the normalization of monetary policy, but the private productive sector suffers the crunch.
When the central bank tries to reduce inflation with rate hikes and monetary contraction, but the government increases spending and keeps an astonishing pace of indebtedness, what follows is wealth confiscation and stagnation.
The latest unemployment figures show the divergence between headline positive figures and reality. Yes, the official unemployment rate is optically low at 3.7 percent, but the labor participation rate remains at 62.4 percent, or 1 percentage point below its February 2020 level. Real wage growth is negative and consumer confidence remains extremely low. The Ipsos-Forbes Advisor U.S. Consumer Confidence Tracker fell back below the 50-point mark, which indicates contraction, in the first week of September.
The private sector is truly in a bad shape. The August S&P Global U.S. Sector Purchasing Managers’ Index shows all sectors in contraction. The report states that the financials sector “continues to record [the] fastest fall in activity,” health care “signals [the] sharpest decline in activity on record,” and the “industrials and technology output drops into contraction territory.” And they say there’s no recession risk?
The U.S. economy is projected to add just 8.3 million jobs from 2021 to 2031, according to the Bureau of Labor Statistics. Total employment is projected to grow by 0.5 percent annually, which is half the 1 percent annual growth recorded over the 2011–21 decade. And this projection is for a period in which it’s estimated that public debt will increase by another $10 trillion with an average annual deficit spending of $1 trillion.
Think of the trend for a second: The government adds trillions of so-called stimuli to the economy, the multiplier effect is inexistent, even when all conditions remain positive, then the same government increases debt and deficits again because of an exogenous factor, and the result is even more debt.
In the past three decades, the result has always been the same: The U.S. economy exits a crisis with significantly more debt, lower employment growth, weaker real wage growth, and slower GDP recoveries. Why? Government spending on everything and anything for any occasion is the equivalent of an athlete eating cake to face the challenging curves and expecting to run faster afterward.
Excessive monetary and fiscal intervention have left higher inflation and a weaker economy. Rate hikes may help reduce inflation, but permanent deficit spending will continue to erode the purchasing power of wages and deposits.
The United States seems to be on its way to a private sector contraction of unprecedented levels as it may affect all relevant industries at the same time. The divergence between the ISM indicator and the S&P Global PMI indicator also shows another worrying trend: Large businesses are doing fine in a high inflation–low growth economy, but small and medium enterprises, which create about 65 percent of employment, are in deep contraction.
Someday we’ll understand that supply-side measures create fewer headlines but have a better impact on the economy than a constant increase in government size and spending followed by more debt, more taxes, and more inflation.
