2023-03-06 11:01:15 ET
Summary
- The Biden administration is expected to spend lots of money in the near future and to increase the federal debt by a lot.
- But, economic growth is expected to remain quite dismal.
- Federal spending does not seem to be doing anything for the economy in terms of economic growth, and so the question arises, "Is the government spending doing any real good?"
- It could be that most of its spending is going into the financial circuit of the economy and not into spending on goods and services.
President Biden, this week, will release his annual budget blueprint for the year.
The battle is going to be over the deficit and Mr. Biden's take on how the government should spend money.
The bottom line is that federal deficits are going to "take off" regardless of how Mr. Biden presents his package.
The Congressional Budget Office has already given us a look at what the deficit over the next ten years might look like. I have already presented my picture on what I think of this scenario.
"The CBO expects us to add $19 trillion in new debt over the next ten years, adding on to the $31.4 trillion of old debt that already exists."
"Do we have a problem?"
"I think that we do!"
Federal Debt Held By Public (Congressional Budget Office)
Then we have the forthcoming battle over the debt ceiling.
What is that going to look like?
But, I don't think this is the whole story.
Taking A Different Look
Things have changed.
I think we need to take a different look at the fiscal picture.
And, the look stems from such reports as this.
I have seen many research reports that state that two-thirds of the Trump economic stimulus plan went to finance stock buybacks.
That is, a lot of the money that was supposed to go into stimulating growth in the real economy went into the financial circuit of the economy.
I have been writing about this kind of behavior for quite a few years now. I have been arguing that much of the money produced by the federal government aimed at increasing the real output of the economy has gone into the financial sector and has resulted in the rising price of financial assets.
This particularly was the case during the Obama administration, as we saw an administration that wanted to create a consumer wealth effect that would stimulate consumer spending and get the economy moving again.
The Federal Reserve's policy of "quantitative easing" was a part of this policy effort, an effort I had labeled as "credit inflation"
Stock prices rose almost continuously during the Obama reign...and the economy grew steadily...although at a very modest pace.
The compound annual rate of growth of the U.S. economy during the economic recovery following the Great Recession was only 2.2 percent. This was the slowest economic recovery since the end of World War II.
The government money created flowed more into the financial circuit of the economy than ever before.
Another way of looking at this impact was to talk about the multiplier connected with the increase in the expenditures of the federal government.
Optimists of government spending policies have always contended that the multiplier of government spending was significantly greater than one.
Note, however, that very little has been said about the government spending multiplier these days.
The reason is that there is some real belief that the government multiplier has actually been less than one in recent years when credit inflation has been so strong.
Another Look
Another indicator that government spending is going into the financial circuit of the economy and not into the "real" sectors is the growth of labor productivity.
In earlier years, government spending was used by corporations to spur on the growth of labor productivity.
The growth of labor productivity was the primary driving force behind the real growth of the economy. In those days, labor productivity grew at a level above 2.0 percent.
In recent years, since the end of the Great Recession, the growth rate of labor productivity has often been below 1.0 percent and has even dropped, in some years, into negative territory.
Government spending must not be going into the areas that produce a greater growth rate in labor productivity, like it was the case in earlier years.
Again, the federal government is not getting the "bank for the buck" it used to get in terms of stimulating spending for "real" output. The federal government spending is going into the financial circuit, generating rising prices of financial assets.
And, The Money Stock
One final piece of evidence.
Let's look at how fast the money stock is turning over.
The rate at which the money stock turns over is called the "Velocity of Circulation." It is calculated by dividing the dollar value of economic output by the size of the money stock. It does not include any circulation of the money stock in the financial world.
Historically, in normal times, the velocity of circulation of the money stock remains relatively constant. This means that what is happening to the money stock can give us a fairly good idea of what is going on in the economy in terms of economic output or inflation.
The facts! The velocity of circulation of the M2 monetary stock has declined substantially since the end of the Great Recession.
Note that the velocity of the M2 money stock has declined by at least two-thirds during the time that the federal government was increasing government spending and the Federal Reserve was generating "quantitative easing."
In other words, people were not turning over the increasing government spending but were putting more and more money into financial assets.
The Conclusion
Over the last decade or so, the federal government has been substantially increasing government spending and growing the money stock very rapidly, and yet the economy has not been responding as it has in the past.
Credit inflation, which has now been in place since the 1960s, seems to rule the marketplace.
Thus, the government's efforts to achieve faster economic growth and to get more money out into the economy so that people can spend it seems to have failed.
But, the government does not seem to recognize this fact.
And, so the federal government pushes for more spending and for more budget deficits.
This does not appear to be the "right" focus.
The government's efforts are not going into the production of goods and services.
The government's money is going into the financial circuit of the economy.
The forecasts of economic growth over the next two to three years are dismal, at best, and this is seen in the projections used by the Federal Reserve's Board of Governors.
For 2023, the U.S. economy is expected to grow by 0.5 percent. It is expected to grow by 1.6 percent in 2024 and 1.8 percent in 2025. For the longer term, the expected growth rate is 1.8 percent.
Seems like all the spending and all the deficits will contribute little or nothing to the real output of the economy,
For further details see:
Budget Battle: Get The Right Focus