Summary
- The revised numbers for real economic growth in the U.S. economy show that year-over-year, the economy rose by only 0.9 percent, down from a first estimate of 1.0 percent.
- More and more evidence is showing that the efforts of the government to stimulate the demand side of the economy are not working out; the supply side needs more attention.
- Labor productivity, the major support factor of supply-side economic growth, is getting little or no attention, and so growth lags.
- Monetary stimulus is still primarily going into the financial circuit, and so real capital investment in corporations also lags, again restraining supply-side economic growth.
- On top of all this, the Federal Reserve continues to run its policy of quantitative tightening, seeking to bring inflation down to its 2.0 percent target.
I have argued that the demand-side economic policies of the federal government are not working as generators of faster real economic growth.
Let's look at another piece of evidence that backs up this feeling and adds to the argument that what the U.S. economy really needs are policies to build up the supply-side growth of the economy.
Take a look at what has happened to the velocity of circulation of the M2 money stock over the past 15 years or so.
The velocity of circulation of the M2 money stock had been declining previous to 2000 but seemed to have leveled out during the first decade of this century.
As can be seen in the chart, the velocity of circulation began declining again at the start of the Great Recession, which took place between December 2007 and July 2009.
But, note, it continues to decline during the economic recovery that followed the Great Recession.
What was going on here?
Well, the Federal Reserve was pushing two rounds of quantitative easing , and the Obama administration was contributing budget deficits aimed at stimulating the economy.
Rather than creating a period of accelerated economic growth, however, the policymakers saw a large portion of the monetary and fiscal stimulus go into the financial circuit of the economy and not into the real sector, stimulating production and productivity growth.
This increasing movement of stimulus monies into the financial circuit of the economy is captured by the falling velocity of the M2 money stock.
That is, asset prices increased during this time period, at the expense of real economic growth and improving labor productivity.
I have labeled this type of performance "credit inflation" because asset prices are increasing due to the economic policies of the Federal Reserve and the government, while consumer prices are only increasing at a very modest rate.
This credit inflation is captured by the rise in stock prices. Notice what happened to stock prices during this period of time.
I might add, that this rise in stock prices was exactly what Federal Reserve Chairman Ben Bernanke wanted. The monetary policy was aimed at creating a wealth effect through rising stock prices so as to stimulate consumer spending.
Corporations, in this environment, had the incentive to seek higher stock prices and so diverted funds to stock buybacks and higher dividend payouts to encourage a greater increasing their stock prices, rather than spend the stimulus money to purchase new capital equipment or to increase labor productivity.
So, the stimulus taking place during the 2010s aimed at the demand side of the economy did not work.
And, little or nothing was done to try and stimulate the supply side of the economy, and so economic growth during the 2010s was the slowest on record for a period of economic recovery.
The Pandemic Stimulus
The government's response during the 2020s was tremendous.
Both the federal government and the Federal Reserve System did all they could to keep the U.S. economy from falling into a hole, due to the spreading Covid-19 pandemic.
Guess what?
Doesn't look like most of the stimulus went into the real sector of the economy.
M2 velocity plummets.
People hoard what the federal government and the Federal Reserve gave them.
Note on the above chart that although M2 velocity has increased since the massive decline during the Covid-19 recession, it has come back nowhere near what the level of velocity was before the Pandemic hit.
So, M2 velocity is now around 1.2, whereas it was around 2.0 just before the Great Recession.
In other words, the federal government and the Federal Reserve put out lots and lots of resources to the public over the past 15 years or so, but, it appears as if the vast majority of these monies went into the financial circuit of the economy.
It has only been since early in 2022 when the Federal Reserve began to "fight inflation" that the situation has changed.
But, the Fed's dilemma is that there are still massive amounts of money still moving around the economy.
As the Federal Reserve tightens up in its fight against inflation, what remains completely unknown is what will the private sector do with all these monies still floating around.
It is highly unlikely, however, that these funds, if put into use, will go to stimulate the supply side of the economy, and will certainly not go into efforts to grow labor productivity.
Fourth Quarter Economic Growth
The economic results for the fourth quarter growth of the U.S. continue to confirm this sad picture.
The economic growth in the fourth quarter of 2022, year-over-year, declined to 0.9 percent from 1.0 percent.
So, the economic growth in the United States for the year 2022 shows that the economy performed worse than originally thought.
I don't think that we should be surprised about this going forward in 2023.
To get a stronger economy that is growing faster, more emphasis is going to have to be put on creating incentives for the supply side of the economy.
More and more demand-side stimulus isn't going to take the U.S. economy anywhere.
For further details see:
The Government's Demand-Side Policies Are Not Producing Economic Growth