 This commentary was originally published at EconLib here.
Americans say the economy is the most important problem facing the country. But major headlines covering the latest jobs report for August do their best to downplay this concern. The New York Times’ headline covering the news was, “August Jobs Report: U.S. Jobs Growth Forges On,” but the economic reality is far less cheerful. Sure, the jobs report beat the consensus estimate by economists. But that high-level look at the data fails to address underlying issues keenly felt by many Americans that are apparent with more scrutiny. And these problems won’t be over unless policies out of D.C. substantially and quickly improve. Last month, 187,000 jobs were added, according to the payroll survey, compared with the anticipated 170,000. But the jobs added in the prior two months were revised lower by a cumulative 110,000 jobs, bringing the net jobs added in August to just 77,000. This extends an ongoing trend of downward revisions over the last several months. According to the household survey, the unemployment rate, a weak indicator of the labor market’s strength, jumped substantially from 3.5% to 3.8%. Coupled with news of slow wage growth of just 0.2% last month, there is growing concern among Americans trying to make ends meet. We know the higher unemployment rate isn’t from too few jobs available. The number of job openings has been nearly double that of those unemployed for a long time, though decreasing quickly. Instead, the higher rate suggests a sluggish economy in which there are more unemployed or ghost job openings from companies that do not intend to hire but want to gauge interest and competition. There is some good news. The labor force increased by 736,000, which raised the participation rate to 62.8% in August. This is the highest rate since February 2020, just before the shutdowns in response to the COVID-19 pandemic. More people entering the labor force and higher participation rates appear promising. However, the increase in the labor force was a combination of 222,000 more people employed, with the other 514,000 people becoming unemployed. And diving deeper, 4.2 million more adults remain not in the labor force compared with February 2020. Many of these individuals have been unemployed for years, so obtaining employment could be difficult due to a lack of productivity signals in their resume on top of employers dealing with a stagnant economy. The rise in the unemployment rate, lackluster wage growth, and the possibility of unfilled job openings all point to a weak labor market. Add in ongoing stagflation, as too-high inflation continues, and Americans are rightly concerned about the future. Some blame the Federal Reserve for this weakness because of its fight to bring down inflation after creating it. However, Milton Friedman debunked this tradeoff between lower inflation and a higher unemployment rate decades ago. Specifically, there’s no long-run tradeoff between the two, so the Fed must focus on the single mandate of price stability instead. The Fed has been working to combat inflation by hiking its interest rate target to a multi-decade high of 5.5% and slowly reducing its bloated balance sheet. This is why you’ve seen car loan and mortgage rates soar to multi-decade highs. These higher rates significantly disrupt the new car and housing markets. But this is the resulting bust after the artificial post-pandemic “boom” as new money moves throughout the economy and manipulated interest rates create malinvestments. We felt the higher inflation rate last year from the Fed’s actions of close to 9%, and now it’s about one-third of that rate, but this remains about 50% higher than its 2% flexible average inflation target. The Fed has stated that it may raise interest rates further. And I believe that it will be forced to raise its target rate to about 6% before this hiking cycle is over. But just raising this rate won’t be enough to curb inflation for long if Congress’ deficit spending remains unchecked. This will force the Fed to monetize it to avoid putting more pressure on Congress to get their irresponsible fiscal house in order. President Biden and Democrats in Congress made this situation worse with the passage of the misnamed Inflation Reduction Act, which is likely to cost about four times the initial $300 billion estimate over a decade. Their wasteful spending, along with Republicans’ excessive spending before them, has led to a fiscal crisis, the most significant national threat. Congress will unlikely make the needed reforms to the primary drivers of the deficit of mandatory spending programs like Social Security and Medicare because of rent-seeking in politics. This will likely result in the Fed not sufficiently cutting its balance sheet to stop inflation. Rather, the Fed will probably choose to increase its balance sheet, putting more inflationary pressure on the economy when that’s the last thing it needs. A vital measure of the economy known as real gross domestic output, the real average of gross domestic product and gross domestic income, has declined in three of the last six quarters. While I don’t want there to be a hard landing, this is the situation that central planners by Congress spending and taxing too much, President Biden regulating too much, and the Fed printing too much have left us. There will be efforts by the government to correct these government failures, but we shouldn’t double down on past mistakes. Let’s learn from these failures and remember the most recent lesson in the 1980s: President Reagan cutting regulations, Congress passing tax cuts (but spending too much), and Fed Chairman Paul Volcker cutting the balance sheet. Initially, the cuts to the Fed’s balance sheet contributed to soaring double-digit interest rates, and the economy suffered a double-dip recession. However, afterward, the economy was able to heal from the prior hindrances of past presidents, congressional members, and the Fed, resulting in a long period of economic prosperity, which is often called the Great Moderation. What we have today is an economy where the government is growing, and markets aren’t as much. This must be reversed. When workers, entrepreneurs, and employers are free to engage in voluntary transactions, competition thrives, innovation flourishes, and resources are allocated efficiently. Moreover, free markets promote consumer choice and personal freedom. When government interventions, such as wasteful spending, excessive regulations, and high taxes, are removed, markets can function more efficiently and respond dynamically to changing economic conditions. Striking the right balance between constitutionally limited government functions and preserving the freedom of markets is crucial for achieving a vibrant and prosperous economy. Rising unemployment, stagnant wages, and the specter of inflation require a multifaceted approach. Raising interest rates hasn’t been enough. The government must focus on responsible fiscal and monetary policies, including reducing government spending, addressing burdensome regulations and taxes, and substantially cutting the Fed’s balance sheet. Americans are still suffering, and there is no time to waste in aggressively assessing these measures that cause economic strain so that people can get back to flourishing instead of merely “making it.”
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Today, I cover: 1) National:
3) Other: My thoughts on the DOJ lawsuit against Google for violating antitrust laws and why I believe it's an attack on consumers and capitalism. You can watch this TWE episode and others along with my Let People Prosper Show on YouTube or listen to it on Apple Podcast, Spotify, Google Podcast, or Anchor. Please share, subscribe, like, and leave a 5-star rating!
For show notes, thoughtful insights, media interviews, speeches, blog posts, research, and more, please check out my website (www.vanceginn.com) and subscribe to my newsletter (www.vanceginn.substack.com), share this post, and leave a comment.  Americans say the economy is the most important problem facing the country. But major headlines covering the latest jobs report for August do their best to downplay this concern. The New York Times’ headline covering the news was, “August Jobs Report: U.S. Jobs Growth Forges On,” but the economic reality is far less cheerful.
Sure, the jobs report beat the consensus estimate by economists. But that high-level look at the data fails to address underlying issues keenly felt by many Americans that are apparent with more scrutiny. And these problems won’t be over unless policies out of D.C. substantially and quickly improve. Last month, 187,000 jobs were added, according to the payroll survey, compared with the anticipated 170,000. But the jobs added in the prior two months were revised lower by a cumulative 110,000 jobs, bringing the net jobs added in August to just 77,000. This extends an ongoing trend of downward revisions over the last several months. According to the household survey, the unemployment rate, a weak indicator of the labor market’s strength, jumped substantially from 3.5% to 3.8%. Coupled with news of slow wage growth of just 0.2% last month, there is growing concern among Americans trying to make ends meet. We know the higher unemployment rate isn’t from too few jobs available. The number of job openings has been nearly double that of those unemployed for a long time, though decreasing quickly. Instead, the higher rate suggests a sluggish economy in which there are more unemployed or ghost job openings from companies that do not intend to hire but want to gauge interest and competition. There is some good news. The labor force increased by 736,000, which raised the participation rate to 62.8% in August. This is the highest rate since February 2020, just before the shutdowns in response to the COVID-19 pandemic. More people entering the labor force and higher participation rates appear promising. However, the increase in the labor force was a combination of 222,000 more people employed, with the other 514,000 people becoming unemployed. And diving deeper, 4.2 million more adults remain not in the labor force compared with February 2020. Many of these individuals have been unemployed for years, so obtaining employment could be difficult due to a lack of productivity signals in their resume on top of employers dealing with a stagnant economy. The rise in the unemployment rate, lackluster wage growth, and the possibility of unfilled job openings all point to a weak labor market. Add in ongoing stagflation, as too-high inflation continues, and Americans are rightly concerned about the future. Some blame the Federal Reserve for this weakness because of its fight to bring down inflation after creating it. However, Milton Friedman debunked this tradeoff between lower inflation and a higher unemployment rate decades ago. Specifically, there’s no long-run tradeoff between the two, so the Fed must focus on the single mandate of price stability instead. The Fed has been working to combat inflation by hiking its interest rate target to a multi-decade high of 5.5% and slowly reducing its bloated balance sheet. This is why you’ve seen car loan and mortgage rates soar to multi-decade highs. These higher rates significantly disrupt the new car and housing markets. But this is the resulting bust after the artificial post-pandemic “boom” as new money moves throughout the economy and manipulated interest rates create malinvestments. We felt the higher inflation rate last year from the Fed’s actions of close to 9%, and now it’s about one-third of that rate, but this remains about 50% higher than its 2% flexible average inflation target. The Fed has stated that it may raise interest rates further. And I believe that it will be forced to raise its target rate to about 6% before this hiking cycle is over. But just raising this rate won’t be enough to curb inflation for long if Congress’ deficit spending remains unchecked. This will force the Fed to monetize it to avoid putting more pressure on Congress to get their irresponsible fiscal house in order. President Biden and Democrats in Congress made this situation worse with the passage of the misnamed Inflation Reduction Act, which is likely to cost about four times the initial $300 billion estimate over a decade. Their wasteful spending, along with Republicans’ excessive spending before them, has led to a fiscal crisis, the most significant national threat. Congress will unlikely make the needed reforms to the primary drivers of the deficit of mandatory spending programs like Social Security and Medicare because of rent-seeking in politics. This will likely result in the Fed not sufficiently cutting its balance sheet to stop inflation. Rather, the Fed will probably choose to increase its balance sheet, putting more inflationary pressure on the economy when that’s the last thing it needs. A vital measure of the economy known as real gross domestic output, the real average of gross domestic product and gross domestic income, has declined in three of the last six quarters. While I don’t want there to be a hard landing, this is the situation that central planners by Congress spending and taxing too much, President Biden regulating too much, and the Fed printing too much have left us. There will be efforts by the government to correct these government failures, but we shouldn’t double down on past mistakes. Let’s learn from these failures and remember the most recent lesson in the 1980s: President Reagan cutting regulations, Congress passing tax cuts (but spending too much), and Fed Chairman Paul Volcker cutting the balance sheet. Initially, the cuts to the Fed’s balance sheet contributed to soaring double-digit interest rates, and the economy suffered a double-dip recession. However, afterward, the economy was able to heal from the prior hindrances of past presidents, congressional members, and the Fed, resulting in a long period of economic prosperity, which is often called the Great Moderation. What we have today is an economy where the government is growing, and markets aren’t as much. This must be reversed. When workers, entrepreneurs, and employers are free to engage in voluntary transactions, competition thrives, innovation flourishes, and resources are allocated efficiently. Moreover, free markets promote consumer choice and personal freedom. When government interventions, such as wasteful spending, excessive regulations, and high taxes, are removed, markets can function more efficiently and respond dynamically to changing economic conditions. Striking the right balance between constitutionally limited government functions and preserving the freedom of markets is crucial for achieving a vibrant and prosperous economy. Rising unemployment, stagnant wages, and the specter of inflation require a multifaceted approach. Raising interest rates hasn’t been enough. The government must focus on responsible fiscal and monetary policies, including reducing government spending, addressing burdensome regulations and taxes, and substantially cutting the Fed’s balance sheet. Americans are still suffering, and there is no time to waste in aggressively assessing these measures that cause economic strain so that people can get back to flourishing instead of merely “making it.” Originally published at Econlib.  As the U.S. commemorates Labor Day, we should consider how many Americans aren’t actively participating in the workforce and what to do about it.
The labor force participation rate was 66% in 2007, declining to 63.3% in February 2020. Today, it’s even lower at 62.8%. Although there are many reasons for this trend, including Baby Boomers retiring, one glaring cause that will continue to exacerbate it with time is the flawed safety-net system. Labor Day was created to commemorate the many contributions of American workers, and rightly so. There’s an inspiring symbiotic relationship between the dignity individuals derive from working and the flourishing that the country experiences as a result. This is why it’s so concerning that the current structure of the many safety-net programs can disincentivize work-capable individuals from seeking, finding and keeping employment. Too often, these recipients become trapped in a cycle of government dependence. Programs like Temporary Assistance for Needy Families (TANF) and Supplemental Nutrition Assistance Program (SNAP) have minimal work requirements. This can discourage users from seeking better-paying employment opportunities, especially if the increase in income reduces the payments from these programs, which is called a benefits cliff. With purchasing power decreased from ongoing inflation, dependence on these programs is growing. There’s a high cost of these programs on recipients and taxpayers funding it, with little to show for it. Anti-poverty efforts have cost taxpayers about $25 trillion (adjusted for inflation) since 1965 and more than $1 trillion annually. While the official poverty rate in America has barely changed since 1970, only six years after President Lyndon B. Johnson declared the “war on poverty,” other measures show substantial improvements in people’s livelihoods. But much of that is because of safety-net programs that boost people’s income at the expense of other taxpayers. Ideally, a flourishing civil society with strong families, communities, nonprofits, churches and other institutions in civil society would render government assistance irrelevant. But we’re a long way from that vision being attainable. Until then, these programs need key reforms, and implementing empowerment accounts (EAs) would help. EAs are designed to consolidate state-administered safety-net programs into a single account accessible through a debit card. While they initially focus on streamlining existing programs, their potential lies in gradually replacing most, if not all, other safety-net programs over time. EAs incorporate a work requirement for work-capable adults, complemented by skills training and education. Recipients would also have access to financial literacy education, community-based case management and opportunities to build savings while enrolled in the program, helping reduce the benefits cliff. An essential aspect of EAs is their adaptability. The account’s government contribution would depend on current income, assets and dependents. Unlike current safety-net programs with income thresholds that create benefit cliffs, empowerment accounts would use a time limit while offering more flexible income limits for up to a year. This approach ensures recipients are motivated to achieve self-sufficiency within a defined period. Community-based case management, provided by established non-profit organizations, would connect recipients with crucial resources and foster connections within local communities. EA’s structure of requiring participation from safety-net recipients would go beyond merely providing financial assistance to equipping them to sustain fiscal and employment stability. The result would not only mean taxpayer funds are more efficiently spent, but struggling individuals are equipped for independence, leading to a decreased poverty rate, higher labor force participation rate and a flourishing economy. Too often, the government promotes mediocrity by quickly “rescuing” people from their situation without showing them how to maintain stability. But all individuals deserve to experience the irreplaceable satisfaction that comes from earned self-sufficiency. While celebrating Labor Day, Americans should emphasize not lack of work but meaningful work that aligns with individual callings. By empowering individuals to regain their financial independence through encouraging labor force participation, we pave the way for holistic human flourishing. Implementing empowerment accounts would mark a pivotal step towards promoting prosperity and reducing dependency on government safety nets. Originally published by The Daily Caller. Texas is a leader in job creation over the last year and since February 2020. But Texas faces major headwinds as the recently ended 88th Legislature looked more like California than what is expected from the free-market bastion of hope and prosperity in Texas.
The best path to let people prosper is free-market capitalism as it is the best economic institution that supports jobs and entrepreneurship for more people to earn a living, gain skills, and build social capital. Table 1 shows Texas’ labor market for July 2023 from the U.S. Bureau of Labor Statistics.  The labor market continues to improve in Texas even as there are some weaknesses remaining.
The economy continues to expand in Texas though there are headwinds.
Strengthening the Texas Model will help Texans better resist D.C.’s overreach and flourish more for generations to come. Louisiana has many fantastic resources with educated people, eccentric culture, robust ports, abundant oil and gas production, and much more yet poor public policies stifle this potential, highlighted by job losses in July 2023. The Pelican Institute’s “Comeback Agenda” shows the path forward to let people prosper. Table 1 provides Louisiana’s key labor market information over time, including the latest data for July 2023 that was recently released by the U.S. Bureau of Labor Statistics.  These data indicate some strength on the surface, but we must look deeper to see how Louisianans are really doing in this economy. Louisiana’s unemployment rate is lower but for the wrong reasons as people continue to leave the labor force.
Overview of the labor market in industries in Louisiana. 
Compared with neighboring states based on several measures there continue to be major concerns with the labor market and other areas in Louisiana. Another one of those is economic growth. Table 2 shows how the U.S. and Louisiana economies performed since 2020, as reported by the U.S. Bureau of Economic Analysis. 
This Week's Economy Ep. 20 | Fitch Downgrades U.S. Credit Score, New Weaker Jobs Report & More8/4/2023 Today, I cover: 1) National: Findings from the latest (weaker) Jobs Report, household survey, average weekly earnings, and my thoughts on Fitch downgrading the U.S. credit score; 2) States: Why state and local tax revenues are down and what it means; and 3) Other: My recent interviews on Fox Business, NTD News, and KTRH Houston discussing the Fitch downgrade and how Bidenomics rewards the wealthy. Check out the latest Chart of the Century put out by AEI.  You can watch this episode and others along with my Let People Prosper Show on YouTube or listen to it on Apple Podcast, Spotify, Google Podcast, or Anchor. Please share, subscribe, like, and leave a 5-star rating!
For show notes, thoughtful insights, media interviews, speeches, blog posts, research, and more, check out my website (https://www.vanceginn.com/) and please subscribe to my newsletter (www.vanceginn.substack.com), share this post, and leave a comment.  Our new jobs report highlights Louisiana’s economic situation based on the most recent data. The report is based on several key factors that indicate how the economy, labor market, and public policy influence the lives of everyday Louisianans. While some of these data indicate a relatively strong labor market–such as the historically low unemployment rate–there are underlying factors showing Louisiana’s economic struggle. Louisiana’s comeback story will happen through reforms that remove government barriers, bring jobs and opportunity back to Louisiana, and let people prosper. We must decide: Will we continue to hold on to the status quo (which hasn’t done us any favors), or will we embrace the significant reforms necessary to bring jobs and opportunity to Louisiana? We need the latter. Read the full two-pager originally posted by Pelican Institute. Key Point: Louisiana’s labor market looks okay on the surface, but weaknesses remain because of poor policies which hinder economic opportunity across the state. There’s need for a comeback agenda. Louisiana’s Labor Market: The table below shows Louisiana’s labor market over time until the latest data for February 2023 from the U.S. Bureau of Labor Statistics.  The establishment survey shows that net total nonfarm jobs in the state increased by 2,400 jobs last month (+0.1%), bringing total jobs to 46,600 jobs below the pre-shutdown level in February 2020. Private sector employment was up by 2,500 jobs (+0.2%) and government employment declined by 100 jobs (-0.1%) last month. Compared with a year ago, total employment was up by 35,500 jobs (+1.9%), which was the 7th lowest rate in the country, with the private sector adding 31,700 jobs (+2.0%) and the government adding 3,800 jobs (+1.2%). The household survey finds that the working-age population declined by 1,181 people (-0.03%) last month, down 12,944 people (-0.4%) over the last year, and down 31,247 people (-0.9%) since February 2020. But the civilian labor force rose by 8,240 people (+0.4%) last month, 4,312 people (+0.2%) over last year, and 9,465 people (+0.5%) since February 2020. These figures result in a labor force participation rate of 59.0% which is up from 58.3% since pre-shutdown but well below the 61.2% rate in June 2009 at the trough of the Great Recession. While the unemployment rate of 3.6% is substantially lower than the 5.2% rate in February 2020, a broader look at Louisiana’s labor market shows that Louisianans still face challenges, especially compared with neighboring states based on several measures.  Economic Growth: The U.S. Bureau of Economic Analysis (BEA) recently provided the real (inflation-adjusted) gross domestic product (GDP) in Q3:2022 for Louisiana and other states.  The following table shows how U.S. and Louisiana economies performed since 2020. The steep declines were during the shutdowns in 2020 in response to the COVID-19 pandemic, which was when the labor market suffered most. The decline in real GDP annualized growth of -3% in Q2:2022 was the 5th worst and increase of +2.5% in Q3:2022 ranked 23rd in the country.  The BEA also reported that personal income in Louisiana grew at an annualized pace of +5.8% (ranked 19th) in Q2:2022 (tied +5.8% U.S. average) and of +2.5% (ranked 47th) in Q3:2022 (below +5.3% U.S. average). Bottom Line: Louisianans gained jobs in February but continue to feel the costs of restrictive policies that reduce opportunities for them to find well-paid jobs. Institutions matter to human flourishing but they are too weak in Louisiana according to the Fraser Institute’s ranking of 20th for economic freedom. And the Tax Foundation recently ranked the Pelican State as having the 12th worst business tax climate and 15th highest corporate income tax rate. The state has improved its tax code recently and lower taxes may happen soon, but excessive government spending, highly complicated personal income tax code, and poor business tax climate contribute to a net outmigration of Louisianans and a 19.6% poverty rate that ranks highest in the country. State and local policymakers should work to reverse this trend by passing pro-growth policies.  Comeback Agenda: The Pelican Institute for Public Policy recently released “Louisiana’s Comeback Agenda” to turn things around in the Pelican State by doing the following:
Key Point: The U.S. economy in 2022 had the slowest Q4-over-Q4 growth during a recovery since at least 2009 and average weekly earnings are now down for 22 straight months as inflation keeps roaring. But there’s hope if we just give free-market capitalism a chance to let people prosper.  Overview: Although President Biden recently tried to claim that the state of the union is strong, facts tell a different story. The government failures that drove the “shutdown recession,” high inflation, and weak economic growth over the last three years continue to plague Americans. This includes excessive federal spending leading to massive deficit spending adding up to $7 trillion since January 2020 to reach nearly $31.5 trillion in national debt—about $250,000 owed per taxpayer. This has created a fight between the Biden administration and House Republicans over the debt ceiling, as raising it must come with spending restraint to avoid some of the fiscal insanity that will lead to insolvency if nothing is changed. And more inflation could be on the horizon if the Federal Reserve chooses to monetize more more of the new debt, which past excess has already contributed to 40-year-high inflation rates. These government failures with little relief from pro-growth policies in sight mean that things will get worse before they get better.  Labor Market: The Bureau of Labor Statistic recently released its U.S. jobs report for January 2022. This report came with substantial revisions to seasonal adjustments and population estimates which could bias the data for a while given that the revised estimates include the much of the last three years of data that are highly volatile. And recall the recent report by the Philadelphia Fed finds that if you add up the jobs added in states in Q2:2022 there were just 10,500 net new jobs rather than more than 1 million reported. The establishment survey shows there were +517,000 (+3.3%) net nonfarm jobs added in January to 155.1 million employees, with +443,000 (+3.6%) added in the private sector and +74,000 (+1.4%) jobs added in the government sector. Most of the private sector jobs were added in the sectors of leisure and hospitality (+128,000), private education and health services (+105,000), and professional and business services (+82,000), which these three sectors led over the last 12 months as well; information (-5,000) and utilities (-700) were the only net job declines over the last month and no sector had net job losses over the last year. Average hourly earnings for all employees was up by 10 cents last month to $33.03, or up by +4.4% over the last year. And average weekly earnings in the private sector increased by $13.35 last month to $1,146, or up by +4.7% over the 12 months. The household survey had another large increase of +894,000 jobs added to 160.1 million employed There have been declines in net jobs in four of the last 10 months for a total increase of +1.8 million since March 2022, which is about half of the +3.6 million of the net jobs added per the establishment survey. The official U3 unemployment rate declined slightly to 3.4% which is the lowest since 1969. But challenges remains as inflation-adjusted average weekly earnings were down -1.5% over the last year for the 22nd straight month, weighing on Americans budgets to make ends meet. And since February 2020 before the shutdown recession, the prime age (25-54 years old) employment-population ratio was 0.3-percentage point lower, prime-age labor force participation rate was 0.3-percentage point lower, and the total labor-force participation rate was 0.9-percentage-point lower with millions of people out of the labor force thereby holding the U3 unemployment rate much lower than otherwise.   Economic Growth: The U.S. Bureau of Economic Analysis’ recently released the 2nd estimate for economic output for Q4:2022. The following table provides data over time for real total gross domestic product (GDP), measured in chained 2012 dollars, and real private GDP, which excludes government consumption expenditures and gross investment. And most of the estimates for Q4:2022 and growth in 2022 were revised lower, providing more evidence that 2022 was a very weak year if not a recession.  The shutdown recession in 2020 had GDP contract at historic annualized rates because of individual responses and government-imposed shutdowns related to the COVID-19 pandemic. Economic activity has had booms and busts thereafter because of inappropriately imposed government COVID-related restrictions in response to the pandemic and poor fiscal policies that severely hurt people’s ability to exchange and work. Since 2021, the growth in nominal total GDP, measured in current dollars, was dominated by inflation, which distorts economic activity. The GDP implicit price deflator was +6.1% for Q4-over-Q4 2021, representing half of the +12.2% increase in nominal total GDP. This inflation measure was +9.1% in Q2:2022—the highest since Q1:1981—for a +8.5% increase in nominal total GDP that quarter. This made two consecutive declines in real total (and private) GDP, providing a criterion to date recessions every time since at least 1950. In Q3:2022, nominal total GDP was +7.6% and GDP inflation was +4.4% for the +3.2% increase in real total GDP. But if inflation had been as high as it was in the prior two quarters or had the contribution of net exports of goods and services (driven by natural gas exports to Europe) not been 2.9%, real total GDP would have either declined or been essentially flat for a third straight quarter. In Q4:2022, there was a similar story of weakness as nominal total GDP was +6.6% and GDP inflation was +3.9% for the +2.7% increase in real total GDP. But if you consider the +2.7% real total GDP growth was driven by contributions of volatile inventories (+1.5pp), government spending (+0.6pp), and next exports (+0.5pp) which total +2.6pp, the actual growth is quite tepid like it was in Q3:2022. For all of 2022, real total GDP growth is reported +2.1% year-over-year but measured by Q4-over-Q4 the growth rate was only +0.9%, which was the slowest Q4-over-Q4 growth for a year since 2009 (last part of Great Recession). The Atlanta Fed’s early GDPNow projection on February 24, 2023 for real total GDP growth in Q1:2023 was +2.7% based on the latest data available. The table above also shows the last expansion from June 2009 to February 2020. A reason for slower real private GDP growth in the latter period is due to higher deficit-spending, contributing to crowding-out of the productive private sector. Congress’ excessive spending thereafter led to a massive increase in the national debt by more than +$7 trillion that would have led to higher market interest rates. This is yet another example of how there is always an excessive government spending problem as noted in the following figure with federal spending and tax receipts as a share of GDP no matter if there are higher or lower tax rates.  But the Fed monetized much of the new debt to keep rates artificially lower thereby creating higher inflation as there has been too much money chasing too few goods and services as production has been overregulated and overtaxed and workers have been given too many handouts. The Fed’s balance sheet exploded from about $4 trillion, when it was already bloated after the Great Recession, to nearly $9 trillion and is down only about 6.5% since the record high in April 2022. The Fed will need to cut its balance sheet (see first figure below with total assets over time) more aggressively if it is to stop manipulating so many markets (see second figure with types of assets on its balance sheet) and persistently tame inflation, which there’s likely a need for deflation for a while given the rampant inflation over the last two years.   The resulting inflation measured by the consumer price index (CPI) has cooled some from the peak of +9.1% in June 2022 but remains hot at +6.4% in January 2023 over the last year, which remains at a 40-year high (highest since July 1982) along with other key measures of inflation (see figure below). After adjusting total earnings in the private sector for CPI inflation, real total earnings are up by only +2.2% since February 2020 as the shutdown recession took a huge hit on total earnings and then higher inflation hindered increased purchasing power.   Just as inflation is always and everywhere a monetary phenomenon, deficits and taxes are always and everywhere a spending problem. The figure below (h/t David Boaz at Cato Institute) shows how this problem is from both Republicans and Democrats.  As the federal debt far exceeds U.S. GDP, and President Biden proposed an irresponsible FY23 budget and Congress never passed one until the ridiculous $1.7 trillion omnibus in December, America needs a fiscal rule like the Responsible American Budget (RAB) with a maximum spending limit based on population growth plus inflation. If Congress had followed this approach from 2003 to 2022, the figure below shows tax receipts, spending, and spending adjusted for only population growth plus chained-CPI inflation. Instead of an (updated) $19.0 trillion national debt increase, there could have been only a $500 billion debt increase for a $18.5 trillion swing in a positive direction that would have substantially reduced the cost of this debt to Americans. Of course, part of this includes the Great Recession and the Shutdown Recession, so these periods would have likely been good reason to exceed the limit, but regardless we would be in a much better fiscal and economic situation with this fiscal rule. The Republican Study Committee recently noted the strength of this type of fiscal rule in its FY 2023 “Blueprint to Save America.” And to top this off, the Federal Reserve should follow a monetary rule so that the costly discretion stops creating booms and busts.  Bottom Line: While there appears to be a strengthening labor market in January, let’s see if this continues as my guess is that these were biased from the data adjustments, and we will see a weaker labor market in the months to come. My expectation is that stagflation will continue along with the a deeper recession this year given the “zombie economy” with “zombie labor” of many workers sitting on the sidelines and others are “quiet quitting” along with the failures of many “zombie firms” that live on debt. Ultimately, Americans are struggling from bad policies out of D.C.. Instead of passing massive spending bills, the path forward should include pro-growth policies. These policies ought to be similar to those that supported historic prosperity from 2017 to 2019 that get government out of the way rather than the progressive policies of more spending, regulating, and taxing. The time is now for limited government with sound fiscal and monetary policy that provides more opportunities for people to work and have more paths out of poverty.
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