Investing.com - Whenever there are "unforeseen" economic distortions, governments intervene in the market with economic stimulus programmes. Banks are rescued, companies are saved from bankruptcy, infrastructure projects are launched and incentives to buy are provided.
The money spent on these projects usually exceeds tax revenues and is therefore financed by new debt. But what boosts political poll numbers in the short term has dramatic consequences for each of us in the long term.
Economist Dr. Lacy Hunt of Hoisington Management proved that in the US, debt-based stimulus measures lose their positive effect after 1.5 years at the latest. After three years, they even turn out to be a boomerang and lead to long-term negative growth losses.
Hunt showed that the ratio of US government spending to GDP increased from 25.2 percent in 1971 to 34.3 percent by 2023. Over the same period, however, the growth ratio of real GDP per capita to gross domestic income fell from 2.2 per cent to 1.3 per cent.
From this Hunt deduces that the trend growth of the economy deteriorates when government spending increases in a debt-financed manner.
A study published in 2011 in the Journal of Economic Surveys by Andreas Bergh and Magnus Henrekson shows that this assumption is not completely out of the air.
This study states that for every one percent of additional government spending, the growth of real GDP per capita decreases by 0.05 to 0.1 percent. This is justified by the fact that the cumbersome public sector, which increasingly claims the private sector, prevents growth-promoting innovations.
Sustainable growth only comes from rising productivity, but that is precisely what government stimulus programmes cannot provide. Hunt points out that productivity in the non-farm sector has fallen at a record pace over the past ten quarters. The 1.2 million jobs created in this sector are anything but a reason to rejoice, for they are not evidence of a humming economy, quite the contrary.
While Wall Street rejoiced over the robust economy, it paid no attention to the simultaneous decline in the average workweek from 34.6 to 34.4 hours. But according to Hunt, this means that the number of hours worked is unchanged. So the same work is being done by more workers, which of course drives up labour costs. Is this what economic growth looks like?
Hardly, it is rather a clear signal of deteriorating productivity.
Macroeconomist Mike Shedlock firmly reckons that the trend of declining productivity has only just begun. Debt continues to rise while work-life balance driven Generation Z pushes boomers entering retirement age out of the labour market.
Moreover, carbon neutrality programmes are not reaching consumers. As an example, Shedlock cites, sales of electric vehicles promoted by the Biden administration are already stalling. It now takes 92 days for a dealer to find a buyer, prompting producers to make fewer, as evidenced by recent negative industrial production results.
And while all this is not a rosy outlook for the future, not only the government and the Fed seem to have given up on the possibility of a recession, so have economists. At the same time, however, the discrepancy between GDP and gross domestic income is larger than it has been for 20 years, but this is being ignored. And so Shedlock concludes:
"It would be funny as hell if the recession starts just when economists have finally buried the idea of a recession."
(Translated from German using DeepL)