“And cast ye the unprofitable servant into outer darkness: there shall be weeping and gnashing of teeth.” – Matthew 25:30
Daycare for Adults
In many instances, situations must deteriorate before they can improve. For instance, cutting deficit spending and addressing government inefficiency may initially negatively affect GDP and employment figures. However, these actions are crucial for restoring the economic well-being of America.
For over five decades, U.S. government spending has spiraled out of control, especially in the past two decades. Since 2004, the national debt has surged from $8 trillion to $36 trillion.
This excessive, debt-driven government spending has distorted the economy significantly. It has impacted consumer prices, resulted in a proliferation of unproductive government jobs, and created a misleading appearance of economic growth.
There is no doubt that government spending fuels inflation in consumer prices. Moreover, it inadvertently inflates key economic figures, specifically GDP and employment.
In 2023, government jobs accounted for nearly 25% of all job growth, with an average increase of 43,000 positions each month over the past year. Furthermore, government spending contributed to 30% of the annualized growth as per the latest GDP figures.
If Elon Musk and Vivek Ramaswamy proceed with plans to eliminate numerous federal agencies and cut $2 trillion from government spending, we can expect two significant outcomes: GDP will likely plummet, and the unemployment rate could soar.
Nonetheless, if you have America’s long-term financial and economic stability at heart, such an outcome could be a blessing in disguise. Jobs that merely serve as “daycare for adults” have no place in a healthy economy.
Egg Hunts
When analyzing statistics like GDP and employment, it’s crucial to scrutinize their foundations. Are they reflecting genuine economic activity, or are they simply a facade?
In essence, when reckless fiscal policies inflate GDP and employment statistics, these figures become indicators of decline rather than measures of economic vitality.
How did we reach this point?
The decline can be traced back to several pivotal moments. The introduction of the federal income tax and the creation of the Federal Reserve in 1913 were significant beginning points.
However, the justification for deficit spending as a means to enhance GDP and employment was largely rooted in John Maynard Keynes’ 1936 work, The General Theory of Employment, Interest, and Money.
This book is notoriously challenging to interpret and has unfortunately contributed to a flawed economic mindset. Keynes’ ideas laid the groundwork for reckless economic policies that persist today.
Many politicians and established economists remain captivated by Keynesian theories. They appreciate that it offers a scholarly rationale for their love of debt accumulation and extravagant spending on questionable initiatives. Central planners, too, find it provides theoretical support for implementing their improbable schemes.
For instance, Keynes once suggested that filling bottles with cash and burying them in coal mines could alleviate unemployment. He believed this bizarre public works strategy would ignite an economic boom, enriching everyone.
Alien Invasions
This kind of flawed reasoning has spurred numerous government attempts to rescue the economy from its own excesses. The American Recovery and Reinvestment Act of 2009 and the American Rescue Plan of 2021 are two monumental Keynesian-inspired initiatives passed in recent years. The ramifications of such misguided programs will haunt the U.S. for generations.
In practice, these Keynes-inspired spending programs seldom deliver on their promises of economic revitalization. The growth of debt consistently outpaces GDP growth.
In 1980, federal debt was approximately $1 trillion, while GDP stood at $2.8 trillion. Today, federal debt exceeds $36 trillion against a GDP of about $29 trillion. Over 44 years, GDP has decupled, whereas federal debt has escalated thirty-sixfold.
This alarming disparity nullifies any argument favoring deficit spending as a means to economically grow out of debt. Moreover, even highly acclaimed economists stubbornly cling to Keynesian doctrines, pushing the envelope of rational economics to absurd extremes.
Just a decade ago, Keynes admirer Paul Krugman took the tenets of Keynesian economics to the limits of reason. His departure from logical discourse can be seen when he suggested on cable television that massive borrowing and spending in preparation for an alien invasion could effectively spur economic growth.
The Choice
Decades of absurd fiscal policies have fostered an economy and a workforce overly reliant on government expenditure. This is the challenging landscape that President-elect Trump will confront upon taking office.
He faces a daunting task of resolving a colossal debt crisis partially of his own making, as the national debt increased by $8 trillion during his previous tenure.
Ultimately, the only path to rectify the economy and restore financial health involves facing some harsh realities. The accumulated distortions over the years are too substantial to rectify without first exacerbating the situation.
Years ago, Ludwig von Mises articulated the uncomfortable decision facing Trump’s administration in his work, Human Action.
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
The strategy proposed by Musk and Ramaswamy, as part of their Department of Government Efficiency (DOGE), reflects the preference for a crisis to occur sooner through a voluntary reduction in credit expansion. This impending crisis could manifest as a severe recession or depression.
This choice could be the most beneficial under the circumstances, given Washington’s fiscal mismanagement. But is it too late to avert an absolute collapse of the dollar?
There are no certainties. What is known is this:
A significant reduction of federal employees. The abrupt end of deficit spending. A decline in GDP and burgeoning unemployment—these are prerequisites for renewing America’s fiscal health.
Yet, the transitional phase could span a generation or two, deeply marked by hardship and despair.
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Sincerely,
MN Gordon
for Economic Prism
