The pandemic stimulus never went away
The Fed's rate cut plans this year face strong headwinds. excessive government spending.
Even though the public stimulus measures adopted during and after the pandemic have largely been phased out, federal spending remains very high compared to historical trends. If spending had returned to pre-pandemic trends, the federal government would be spending about $5.8 trillion a year.Instead, we over $7 trillion Third quarter of 2023 (latest quarterly data available).
The graph above reveals something very important. Spending is no longer decreasing. Spending hit rock bottom in 2021 after falling from the previous year's huge levels, but is now rising further. In other words, the economy is adjusting to new levels of federal spending.
According to the calculation by Joe LaVogna SMBC Nikko Securities America has the largest ever $3.3 trillion Cumulative excess federal spending since 2021.
A graph of total government spending reveals something even more surprising. Government spending is increasing rapidly and well above trend.
Government spending tends to be inflationary
When the government sector spends money, most of it goes to the private sector. That is, The effect of government spending is to increase demand for private sector goods and services. Because most of the services and goods produced by the government are not substitutes for those produced by the private sector, the effect is to increase private sector demand without directly increasing private sector production.
in short, Government spending creates inflationary pressures.
This is not up for debate.When the economy is in a downturn and private demand is declining, standard textbooks keynesian economics It recommends increasing government spending to stimulate demand and fight deflation. This is what we did during the pandemic.
If we continue to spend at very high levels, The economic emergency has passed It creates undesirable fiscal impulses that push up demand and inflation.
“The previous administration, with support from Congress, enacted the CARES Act, which provides income support programs designed to help people stay on the payroll of shuttered businesses. “We were able to achieve a rapid V-shaped recovery that began, but federal spending continued for a long time even as the economy continued to recover,” Lavorna said in a recent note to bank clients. I'm writing this.
There's a traitor Persistent aspects of inflation based on fiscal impulses. The price of goods and services increases because the government has to raise wages to compete with private sector employers and must pay more for the products and services it buys from the private sector. requires higher levels of nominal spending. Some of the spending increases are required by statutory laws that require cost-of-living adjustments, and some are required by market laws that require government purchases to be bid against the private sector. requested.
Government employees' salaries have increased too much
Government spending is also one of the main factors tightening the labor market.here is the chart federal employment levels. We can see that the significant increase started in the second half of 2022 and continues unabated.
It is difficult to know exactly where these federal employees are employed. While you can look up high-level salary figures for some government departments, it's more difficult to find out the roles they play. Good job for Congress. We will discover the cause of this expansion.
What exactly is this new civil servant doing? How many of them are employed in pursuit of leftist policy agendas such as information processing? border crosserStrengthening Diversity Equity and Inclusion (DEI) obligationsand distribution climate change subsidies?
People on the government payroll are not producing goods or services purchased by the consumer. However, they are themselves consumers of goods and services produced by the private sector. Therefore, it puts inflationary pressure on the economy and stimulates things like retail spending and consumer spending.
Government employment growth is actually worse than that.it is Decline in private sector production capacity This is because workers who would otherwise be employed to produce goods and services that consumers can purchase are taken away. This is not a problem when the economy's productive capacity is underutilized, for example when unemployment is high, but it is a big problem when the economy is operating at or near potential. This will be a problem.
The Federal Reserve's efforts to rebalance supply and demand have been offset by excessive government spending.This meaning is Recession unlikely It also means that next year, Inflation likely to be stronger than expected.
