Elmore: The Economy is Not Resilient—it’s on a Government-Fueled Sugar-High

by | Apr 16, 2024 | Opinion

By Daniel Elmore

Late last month, the Bureau of Economic Analysis revealed their final revision for gross domestic product in 2023, coming above expectations. Yet, while federal officials celebrate the “resilient economy,” the numbers show an alarming trend.

With a $189 billion expansion over the final three months of the year, the most recent GDP figures initially suggest a favorable economic outlook, potentially averting a recession. However, this apparent growth was primarily stimulated by government expenditures and transfers, which, in turn, rely on deficits. Upon closer inspection, it becomes apparent that this expansion was largely sustained by a $834 billion increase in federal debt during the same period.

Unfortunately, such reckless spending will likely persist in Washington, preventing a recession in the short term until it inevitably leads to a crisis when the bills must be paid.

This comes as Congress passed a $1.2 trillion omnibus spending bill to fund more than half of the government until September 30th, the end of the federal government’s fiscal year. Exceeding well over 1,000 pages, the legislation also funds a number of contentious initiatives such as the establishment of the National Extreme Risk Protection Order (ERPO) Resource Center to help state and local governments “optimize” the use of red flag gun laws, as well as funding allocations for activist groups and earmarked pork projects.

While politicians bickered over the budget, the national debt surpassed $34.6 trillion as the country is running a yearly national deficit equivalent to approximately eight percent of gross domestic product. This spending level has become a permanent part of the budget, rather than just a temporary fluctuation due to a recession.

Such a scenario could potentially steer America towards a downward spiral where, in an attempt to stimulate the economy, the federal government continues to spend more, increasing the deficit to a higher percentage of the gross domestic product and ultimately leading to a devastating debt crisis.

At the same time, annualized interest payments on US government debt have now topped $1 trillion for the first time last year. This equates to over 60% of federal income taxes just being used to pay for interest on the national debt. Even more concerning, interest costs are expected to triple to over $3 trillion by 2030.

Building the nation’s economic growth upon government support, rather than private enterprise investments or consumer spending, is like constructing a house on sand. While it may yield short-term bursts of economic activity, this approach poses a significant challenge to the sustained health of the economy as it risks trapping the American economy in a cycle of debt repayment, hindering genuine economic progress in the long run.

Many Americans are becoming increasingly concerned about this trajectory. Recent data from the University of Michigan’s Survey of Consumers indicates people’s confidence in the economy is twenty percent lower than before the pandemic. This decline coincides with household savings dipping below $800 billion, compared to over $1 trillion saved by consumers four years earlier. Such a trend implies that wages do not match Americans’ spending habits, especially with inflation stubbornly remaining around 3%, a full percentage point higher than the Federal Reserve’s 2% target.

The disconnect between economic indicators and the lived experiences of everyday Americans underscores the necessity for a more sustainable approach to economic policy. Unfortunately, politicians often prioritize short-term reelection strategies over long-term fiscal responsibility as can be seen within their latest spending efforts.

Yet, by the time voters express concern about federal budget mismanagement, it might be too late to rectify the situation without major economic consequences. As the national debt balloons and interest payments soar, politicians face a daunting choice: either maintain current spending levels, risking further inflationary pressures and economic instability, or undertake politically unpopular measures to rein in expenditures, increase taxes, and restore fiscal balance.

As even the mention of altering programs such as Social Security or Medicare will likely result in career suicide for politicians, this creates a vicious cycle where politicians are incentivized to maintain the status quo, perpetuating unsustainable spending patterns and delaying much-needed reforms. Consequently, the inevitable outcome of this cycle is continued inflation eroding the value of consumers’ savings and purchasing power even further.

The short-term stimulus of government spending will crash like a sugar-high, leaving behind economic instability and hardship. Unless policymakers break free from this cycle of instant gratification and address the underlying issues driving fiscal imbalance, the economy will make a turbulent descent.

Daniel Elmore is a Young Voices contributor studying economics at Lenoir-Rhyne University. His commentary has appeared in the Washington Examiner, RealClearMarkets, and Carolina Journal. Follow him on X (formerly Twitter): @daniel_j_elmore

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