A decade into the recovery after the Great Recession and following the largest tax cut in a generation, along with juiced-up government spending, you will not find greater tailwinds for the economy than today. And indeed, the economy is performing well. But if this is the peak of our growth, it portends long-term underperformance of our potential, thanks to a centrally planned economy. Tax cuts are good, but tax cuts in a centrally planned and manipulated economy will only get you so far, especially with the albatross of debt around the neck of our investments.
The topline GDP numbers for Q3 released by the Bureau of Economic Analysis last Friday are undeniably good. The economy grew during the third quarter at an annualized rate of 3.5 percent, following the 4.2 percent growth in the last quarter. With an average median growth of 3.3 percent for the first three quarters of this year, it means that barring some catastrophe in the fourth quarter, we will have our first full year of over three percent growth in 13 years. With low inflation – just 1.6 percent – despite the humming job market, this is definitely a good time to enjoy the economy.
But if we dig a little deeper into the numbers, as I warned following last quarter’s report, the growth has likely peaked, which is not a good sign in the long run, especially following an 18-year drought. Despite Trump’s best efforts on tax policy and some areas of regulation, we are still not living up to our potential and indeed cannot, because of the socialist market distortions and the growing debt.
GDP comprises personal consumption expenditures, gross private domestic investment, government spending, and net exports. Seventy percent of the equation is consumption, and the robust 4.0 percent growth in consumption is a big part of what is driving the good topline numbers. This is not artificial. Consumption is good and a sign of a healthy job market, with more people earning money, as well as the tax cuts putting more cash in people’s pockets to spend. No matter whether our economy is fully free market or quasi-socialist, whenever there is more money in people’s pockets, these numbers will go up. We are now in a boom period, and the numbers are good.
But where we see the signs of permanent lassitude resulting from debt and a centrally planned economy is in the investment numbers. The entirety of the growth among private investments was due to soaring inventory numbers not seen in years. Overall, inventories were responsible for 60 percent of the 3.5 percent topline increase in GDP. Fixed investments in non-residential structures actually contracted the most since 2015. Spending on equipment and intellectual property was nearly at a standstill. In addition, exports were down the most in years thanks to the tariffs. Final sales to private domestic purchasers rose 3.1 percent, which is pretty meager for a booming job market and record corporate tax cuts.
Also, much of the good economic growth is coming from government spending, a temporary sugar high that is weighing us down in the long run because of the debt. According to a recent analysis from the Wall Street Journal, “Faster government spending accounted for nearly half of the acceleration” of growth since April 2017. In other words, if you take government spending out of the equation, the growth would be even less remarkable.
The obvious question is: How come the job market is the most robust since the late ’90s and late ’60s, yet unlike during those periods, we are not experiencing robust economic growth in all the supply-side investment indicators, but only on the consumption side?
Even though we got a shot in the arm from the tax cuts, we no longer have a free market economy. We have a huge misallocation of resources, with all sorts of capital going into government-mandated schemes that increase dependency programs or debt, rather than the most efficient investments. Then the debt itself is hurting us. So much money is now spent on paying off interest. As interest rates are pushed higher, more private money is used to purchase higher-interest Treasury securities rather than invest in capital goods, such as factories and plants. The more government is desperate to service this debt, the more it will drive up interest rates, which in turn will divert and misallocate more investors into Treasury bonds. This further makes interest on the debt even more expensive, constantly reinforcing itself in a vicious cycle of debt and higher rates crowding out private investment.
Thus, we have a vibrant employment market at the peak of the business cycle, but that peak is flattened by the endless market distortions of mandates, regulations, debt servicing, and the Federal Reserve’s market manipulation.
The notion that the next economic move by Trump and Republicans will be yet another tax cut without addressing the debt, dependency, and health care is self-destructive. It’s quite evident that the debt monster is so insurmountable that we cannot “grow our way out of it.” And the more debt we amass, the less dramatic those periods of growth will be.
Daniel Horowitz is a senior editor of Conservative Review. Follow him on Twitter @RMConservative.