In a recent CNN poll, 48% of respondents stated that they believe the economy remains in a downturn, and only 35% said that things in the country today are going well. The disparity between somber economic sentiment and a surprisingly strong headline unemployment rate and Gross Domestic Product (GDP) can be easily explained.
The divergence between headline GDP and Gross Domestic Income (GDI) is staggering. While GDP suggests a strong economy, GDI reveals a stagnant economy. Both measures used to follow a similar pattern, but this changed drastically in 2023. While GDP rose 2.5% in 2023, GDI only bounced 0.5%, effectively signaling economic stagnation.
According to the Bureau of Economic Analysis, real GDI increased only 0.5% in 2023, compared with an increase of 2.1% in 2022. If we use the average of real GDP and real GDI, it increased only 1.5% in 2023, compared with an increase of 2.0% in 2022. Not a recession, but certainly a weak economy.
The unemployment figures show weakness as well. Real wage growth in the past four years has been negligible, at 0.7% per year, four times weaker than the previous four years. Furthermore, the labor force participation rate remains below the pre-pandemic level at 62.5%, the same as the employment-population ratio at 60.1%. Poor real average hourly earnings combined with a decrease of 0.6% in the average workweek resulted in an uninspiring 0.5% increase in real average weekly earnings in the year to February 2024.
There is also a weak trend in profits. In 2023, profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $49.3 billion, compared with an increase of $285.9 billion in 2022, according to the BEA. Profits of domestic nonfinancial corporations increased $66.6 billion, compared with an increase of $247.6 billion in 2022. This is a very weak trend.
All these figures indicate that the US economy is performing significantly better than the euro area, but it is still far below expectations.
Keynesianism is working against the potential of the United States economy. The accumulated $6.3 trillion deficit of the past four years had a negative impact on the economy. Rising taxes and persistent inflation are eroding the average American quality of life. More citizens need to hold more than one job to make ends meet, and the number of multiple jobholders has reached a multi-decade record.
Gross Domestic Income proves the economy is stagnant, and if we look at GDP and GDI excluding the accumulation of debt, they show the worst year since the 1930s.
How can an economy be stagnant with 2.5% GDP growth? Here is the failure of Keynesianism in all its glory. Headline aggregated figures are optically strong due to the accumulation of debt, and employment figures are bloated by government jobs, disguising a struggling private sector and a weakening purchasing power of the currency.
Cheap money is very expensive in the long run, and discontent rises as Keynesianism focuses on increasing the public sector while the productive economy suffers higher taxes and more challenges to pay the bills.
Inflation is a consequence of the misguided increase in government spending and debt monetization in the middle of a post-pandemic recovery, leading to an aggregate loss of purchasing power of the currency that is close to 24% in the past four years. The government is taking in inflation what it promises in entitlement spending. The result? You are poorer.
It is dangerous to blame Americans’ discontent on a lack of information. Americans are suffering a prohibitive tax wedge as well as the hidden tax of inflation just because the government decided to play the oldest trick in the book: promise “free stuff” and print new currency through deficit spending, which makes the allegedly free programs more expensive than ever.
The failure of Keynesianism is evident. Sadly, politicians will promise more Keynesianism and present themselves as the solution to the problem they have created.
