Eating Our Seed Corn

Anyone bothering to think about the laws of economics should have done a double take on this Wednesday’s GDP report for Q3. For one thing, it clearly shouts out that election time is at hand. For the ninth straight quarter government spending has been a big boost to reported “growth” of GDP.

Government Spending Contribution To GDP Growth, Q3 2020 to Q3 2024

Looked at through a related metric the picture is even clearer. Since September 2023 government transfer payments have risen by +7.5% or more than double the gain during the prior (non-election) year. Of course, government transfer payments overwhelmingly go into current consumption spending (PCE), which, in turn, accounts for upwards of 70% of GDP.

Annualized Rate Of Government Transfer Payments, 2023-2024

In fact, it turns out that household consumption (PCE) contributed +2.46% to the Q3 2024 gain along with the above government spending gains, which added another +0.85%.  According to our trusty HP 12c, therefore, these two components amounted to a combined gain of +3.31%.

Then again, total real GDP purportedly expanded by just 2.80%, meaning that the two economic resource consuming sectors of the economy accounted for 118% of reported total growth. By contrast, the economic resource generating sectors of the economy—net foreign trade and net investment—-purportedly subtracted 0.51% from growth!

So, yes, we don’t put great stock in the quarterly GDP numbers. For one thing, the share of GDP accounted for by consumption expenditures (PCE) have been steadily growing over recent decades, even as savings and investment rates have steadily fallen. That is, the quality and sustainability of the quarterly GDP numbers are the real issue, not the top-line growth figures being reported, even as tepid as the latter have been.

Moreover, leading the PCE growth parade has been a relentless rise in transfer payments. Thus, in 1964 on the eve of Medicare and Medicaid enactment, total government transfer payments at all levels stood at just 4.6% of GDP. By the turn of the century in 2000, the transfer payment ratio had grown to 11.6% and recently peaked at  nearly 17% at the top of the pandemic stimmy craze in 2020. In dollar terms, the $32 billion level of transfer payments in 1964 had risen by 130X to $4.17 trillion by 2023.

Needless to say, transfer payments add exactly zero to the current and/or future output of the economy. They reflect an arbitrary reshuffling of the economic pot from producers to consumers by the tax and spending arms of the state for strictly social policy reasons. Accordingly, when it comes to high-quality content of the GDP, the current level of upwards of $4.2 trillion of transfer payments simply doesn’t make the grade.