Avoiding Biden’s Economic Tripwire
With voters correctly sensing that the U.S. economy is in bad condition, the new president and GOP congressional majority must prepare for the worst--and prepare the public for it.
Perhaps the most urgent task before the incoming Trump administration and GOP-led Congress is to prepare the nation for a possible economic downturn. In fact, their real chore is to show the American people that the U.S. economy has been in decline for the past four years, and to do so clearly and decisively.
The economic performance numbers the federal government has given out over the decades have been misleading by their very nature. That is in addition to the Biden-Harris administration’s trick of providing overly positive numbers and then “correcting” them a month or two later, as I have documented regularly in this newsletter and elsewhere.
What is fundamentally deceptive about the economic performance numbers the government hands out each month is their mixing of real production with government effects. All goods and services are created in the private sector. To include government workers and “products” in the economic numbers is to engage in double counting: any positive results of government action are already included in the production of goods and services.
If the government builds a bridge and it contributes to the well-being of the public, it will increase private-sector output. If it does not do so, you can be sure that it was a waste. It should not be counted as growth. If a government-run park refreshes people and improves their health and happiness, that will be reflected in greater work outputs, labor, investments, and consumer spending. If it does not, it was a waste. It was not growth.
This is true of all government spending. It improves people’s lives, or it does not, either of which will affect private-sector economic output.
Thus private-sector output incorporates government “investments” in public goods. Government spending should not be added into figures purporting to indicate the state of the economy.
The employment and unemployment numbers, for example, include government workers, who are a drain on the private sector, as they consume goods and services produced by others. The calculation of gross domestic product (GDP) includes elements of government spending as well. That counts government spending as economic output twice, as noted above.
Writing at Mises Wire, Ph.D. economist Daniel Lacalle points out that the economic policies of the Biden-Harris years artificially inflated the figures for gross domestic product and employment and falsely indicated lower unemployment. Let’s start with his evaluation of GDP:
[I]n the latest GDP figure, government spending accounted for 30% of the annualized growth, while investment was basically stagnant. In the past nine quarters, government spending has been one of the top drivers of GDP growth, and its contribution to GDP in the third quarter of 2024 was the largest in a year.
The official figures are equally deceptive regarding employment, Lacalle notes:
[T]he monthly job figure includes an astonishing 43,000 new government jobs each month. In 2023, nearly 25% of all job gains were government ones, and the entirety of the growth of the labor force in the past four years came from foreign workers. The latest jobs figure is so poor it seems disingenuous to blame it on hurricanes and strikes, as if economists and forecasters had not considered those two factors in their estimates.
Furthermore, the only factor that continued to increase uncontrollably was the number of government jobs, adding 40,000 new positions to an overall total of just 12,000 jobs. No wonder the labor participation rate and employment-to-population ratios remain below 2019 levels.
As I have noted regularly in this substack and in multiple op-eds, government spending is what drives price inflation. To this damage we also must add the economic suppression caused by excessive regulation—which reduces the supply of goods and services below its normal level and can spur inflation in that way. All other explanations for inflation are false excuses or gross exaggerations of smaller contributing factors that would have no great effect without the government’s spending increases and monetization of debt. They may in fact be outcomes of the government’s excessive spending, not the real causes of inflation.
Wildly excessive government spending and monetization of the resulting debt created the price inflation the American people endured during the Biden-Harris years, Lacalle notes:
The United States’ insane inflation is solely due to out-of-control spending and currency printing. Corporations, wars, or supply chains cannot cause aggregate prices to rise, nor can they consolidate the increase even at a slower pace. Although this can have an impact on individual prices, the only factor that causes aggregate prices to rise year after year is the decline in the value of the US dollar that the government issues.
I would add regulation to that rogue’s gallery of economic destruction, as noted above. In any case, Lacalle is correct to lay all this at the feet of the federal government and in particular Biden, Harris, and the 117th Congress (2021-2022), all of whom colluded in this bloody revolution in spending and regulatory asphyxiation.
Federal government revenues rose during this period, thanks to (unnecessarily mild and abbreviated) economic growth in the private sector as the economy continued its recovery from the Covid lockdowns, a revival that began while Donald Trump was still president and which the Biden-Harris overload of spending and regulation soon began to suppress. The problem was that government spending rose much faster than revenues, solely by choice of the Biden-Harris administration and Democrat-controlled Congress, with the vice president casting the deciding votes on some of the most damaging bills:
Lacalle states that the effect of this increase on GDP and jobs was deliberate on the administration’s part. I would not put it past them in terms of ethics and intentions, though I am not sure that the people running the Biden-Harris administration were smart enough to think of that. I believe that they just love to spend and regulate. There is abundant evidence for that conclusion.
Lacalle is right to warn that the press and academia will blame any economic reckoning on Trump if it should arrive after he returns to the Oval Office. I too have been concerned about the possibility, or likelihood, of a downturn (as I noted in issue #77 of this newsletter, for example). Winning the presidency and control of Congress with the nation’s economy at the edge of a rapidly crumbling cliff is a good way to discredit one’s economic principles.
Biden, Harris, and the 117th Congress created this situation, but Trump and the Republicans inherit it, and the press will lay all the blame on them.
To prepare the way for a refutation of that false claim, Trump, the incoming Congress, and all those who support free markets and individual liberty must immediately undertake a program of reminding the public about what has happened to the economy under Biden and Harris, and who is solely responsible for it.
Much of this work has already been done, of course, through the economic destruction that arrived while the Democrats still controlled the White House and the Senate (thus making spending cuts impossible). The Democrats and the press (though I repeat myself) will claim that Trump and the irresponsible Republicans crashed the economy by increasing the federal deficit, when in fact the damage we would be seeing will have been done by the previous administration’s spending.
That should be obvious, given that any Trump/Republican policy changes won’t even begin taking effect until partway through next year or in 2026, especially in terms of tax revenues. Stating the obvious is of great importance, however, when subtle lies are all around.
An important element of this economic info-war will be the popularization of metrics that measure real, private-sector economic growth and eliminate double-counting of government activities and other clutter. These could include real-GDP-minus-government, real GDP minus all forms of consumption (just changes in real, inflation-adjusted output), private-sector job numbers, changes in real private-sector national income, real (after-inflation) private-sector investment, unemployment minus government job expansion, and the like.
A key thing to remember is that all consumption must come from what has been produced. Focusing our attention on production, not consumption, will tell us whether the economy is really growing or not. No figures will tell the whole story, I suppose, but we can do much better than the ones currently deployed, which just happen to make continual expansion of government look like economic progress.
The new numbers should not necessarily replace those that have been used over the decades, but they should at least supplement them, and the administration should foreground them in all of its reports on the economy. The Congressional Budget Office should do the same in making its projections of fiscal effects on the economy. If these numbers should prove more useful over time, the older ones will lose their luster and fall into disuse through a natural process of discovery.
It is possible, of course, that we are already in a recession and this job of recasting the discussion of the economy will not prove as urgent as it now seems to be. It would be foolish to depend on that, however, and this reform effort would have great long-term benefits in providing a more accurate picture of the economy regardless of its present level of urgency. The public has indicated a sound, intuitive understanding of the economy in opinion polls and at the ballot box in the past couple of years. Providing data that accords with that correct view of things will work very much to the advantage of the incoming administration regardless of when or whether a recession hits.
One more thing. Trump’s team and the new Congress must resist the temptation to talk about the Federal Reserve (Fed) and especially avoid blaming it for Bidenflation and the federal deficit. It is true that the nation’s central bank is complicit in the ongoing bouts of inflation and recession and that its monetization of federal debt is an essential foundation for excessive government borrowing. It is also true that the Fed’s policy choices seem to have favored Democrats over Republicans over the years. I support Fed reform or ending it altogether.
Nonetheless, excessive government spending is the problem, and it was Congress, the president, and the vice president that did that. The incoming administration and Congress must concentrate all attention on spending. Spending reform now, Fed reform later. Do not talk about what you are not acting on, and act on the most important things first.
I shall repeat this because it is so important: focus on spending. Leave the Fed aside for now. You’ll thank me later.
The task before the Trump team and the incoming congressional leadership is clear and urgent: define true economic growth, measure it at present and in the past, publicize it, and direct all policy actions toward it. Those who messed up the economy should be forced to wear that dunce cap of dishonor, and those who are working to fix it will have to explain how it all happened and show how their reforms will solve the problems their predecessors created.
Trump and the Republicans must get started on that right away, before the big spenders receive a huge political gift of economic destruction they caused themselves.