Keynesian programs hurt the things they were meant to help. The United States is the best example of this. A few years ago, in 2021, I talked to Judy Shelton. She told me that the recovery would be much better without the stimulus package, and she was right. Massive government spending and creating more money have hurt the economy and made people poorer.
The Bureau of Labor Statistics (BLS) says that nonfarm payrolls went up by 209,000 in June. This was the smallest rise since the end of 2020 and came after two straight months of decreases. If we look at more job statistics than just the unemployment rate, we can see that the labor force participation rate was 62.6 percent for the fourth month in a row, and the employment-population ratio stayed the same at 60.3 percent from the previous month. Both of these numbers come from the BLS. After years of huge welfare and spending programs, both measures (63.3% and 61.1%, respectively) are still below what they were before the pandemic.
There is a reason why workers are not happy with their jobs. All of the printing of money has led to higher inflation and a rebound in which real wages in the US have gone down for 26 months in a row. American workers haven't had such a bad rebound in a long time.
People in the U.S. have more debt than ever before. The Federal Reserve says that credit card debt hit a record high in the first quarter of 2023. At the same time, personal savings as a percentage of disposable income remained well below pre-pandemic levels at 4.6%, a huge 44.7% drop from the end of 2019. After the economy reopened, real retail and food service sales went up, but they are still below their peak in April 2022 and have gone down in six of the last seven months.
The University of Michigan Consumer Sentiment Index is still 40% below where it was before the COVID crisis slump. This is not a surprise.
We have to look at these bad numbers in the context of a so-called "stimulus" that led to a government deficit that went over $7 trillion between 2020 and the first quarter of 2023. We often hear the MMT nonsense that deficits are savings for the private sector and a tool for growth and wealth.
In fact, American workers are in a lot worse shape and have to work harder to make ends meet as their savings and wages are eaten away by the inflationary tax.
Of course, the excuse is to say that things would be much worse without the U.S. government's massive spending plan, but this is standard counterfactual nonsense. These big government spending plans were not made to make up for a slow recovery. Instead, they were made to help improve and speed up the recovery. And the truth is that the recovery is weaker than what has happened in the past, real wage growth is negative, and debt is much higher than it was before. So, from the point of view of return on capital spent, the stimulus plan has hurt a recovery that was already clear because the economy was back open.
We can also say that the stimulus plan, which was paid for with newly created money during a lockdown, was the main cause of inflation, as studies by Claudio Borio and others have shown ("an upsurge in money growth preceded the inflation flare-up, and countries with stronger money growth saw significantly higher inflation," BIS Bulletin, No. 67, January 26, 2023).
Why do I talk about these numbers? Because the reaction from these stimulus plans is likely to cause a recession, the government will try to solve the problem again with another misguided, multi-trillion-dollar plan. But this time, there is no way to increase the deficit. Even the most optimistic estimates show that the current budget plans will lead to a $14 trillion deficit by 2032.
If population aging and deindustrialization keep going as they are, the next stimulus plan could lead to a big debt-deflation spiral like what happened in Japan. Even worse, stagflation could happen if the government decides to use the wrong stimulus checks again. The government gave you $1,000, but the rising tax took away $3,000.
It's clear that we've hit a point where we have so much debt that new stimulus packages don't make things better, they just make people poorer until the next one makes things even worse. Someday, policymakers might understand that progress comes from saving and investing wisely, not from spending and getting into debt.
