Bloomberg reported over the weekend that the UK and Japan both fell into recession at the end of last year, as defined by two consecutive quarters of contracting activity. In Europe, officials said they expect weaker economic growth across the European Union trading bloc.
“Following subdued growth last year, the EU economy has entered 2024 on a weaker footing than expected,” the European Commission wrote in its forecast reported by Axios.
So, what about the United States?
The Associated Press offered some interesting, albeit totally off the wall reasons why the recessionary wave hasn’t hit the United States… yet.
According to the AP, several unique characteristics of the U.S. economy have sheltered it from recessionary storms. For one, the U.S. government provided about $5 trillion in pandemic aid in 2020-2021, far more than overseas counterparts and supported consumer spending well into 2023.
The Biden administration has also subsidized more construction of manufacturing plants and infrastructure through additional legislation passed in 2021 and 2022 that was still having an impact last year. About one quarter of the U.S. economy’s solid 2.5% growth in 2023 was made up of government spending. Republican critics, however, charge that the extended spending contributed to higher inflation.
Another benefit AP identified for the United States is that it experienced a surge in immigration in recent years, which has made it easier for businesses to fill jobs, potentially expand their operations, and has led to more people earning wages — and then spending those earnings.
So, let’s unpack the claims cited by AP as insulating the United States from recession.
In short, the government’s vast inflationary spending spree kept consumer spending up, while immigration, both legal and illegal, depressed wages and allowed business to expand without increasing wages for American citizen workers.
Was that really a good deal for American workers, whose taxes will ultimately have to repay the vast sums borrowed from their depressed wages?
And for how long can the government continue the policies cited as protecting the US from recession?
The answer, according to an article in the Wall Street Journal and linked through our friend Stephen Moore’s must-read Committee to Unleash Prosperity Hotline, is until sometime soon after January 1, 2025.
In the opinion piece by David Malpass, a CTUP advisory board member:
Whoever is inaugurated next January will face a perfect storm. The suspension of the debt limit expires Jan. 1, threatening another bad deal to avoid default and government shutdown. This year’s spending bills will likely be extended just long enough to kick the can into 2025, forcing a budget battle that only the swamp could enjoy. Tax rates will rise at the end of 2025 unless Congress and the president can agree to extend some of the expiring provisions in the 2017 Tax Cuts and Jobs Act. Equally daunting, progressive regulatory activism will also peak in 2025.”
As David Malpass further observed, both the Treasury Department and the Fed are borrowing heavily in short maturities, directly competing with small businesses. This leaves short-term interest rates at 5.4%, too high to promote small-business growth. Progressives have argued that debt-service costs are manageable and that debt levels don’t matter. This voodoo economics is labeled “modern monetary theory” and “modern supply side” but that’s doublespeak for profligacy and big government. Why leave trillions of dollars of resources for future generations when you can borrow and spend them now? Congress should use the next debt-limit crisis to rewrite and strengthen the debt-limit law so that it actually restrains spending and taxation.
Record government borrowing has been crowding out the financing and confidence needed for small businesses to invest and expand, charged Mr. Malpass. Commercial and industrial loans—the lifeblood of small businesses, financing inventory and equipment growth—should have increased by more than $175 billion in 2023 to keep up with inflation and rising GDP. Instead they fell by $38 billion. Looking forward, U.S. banks face increasingly burdensome regulation, including the major risk that unelected government regulators will impose the globalist Basel III Endgame on U.S. banks, raising the cost of making loans without materially reducing bank risk.
What’s more wrote Mr. Malpass, the international economic environment is increasingly unfriendly to the United States. Each time the U.S. automatically complies with multilateral regulatory edicts on climate, taxation, union rules and bank regulation, China gains an advantage. The increasingly powerful Group of 20 has been expanding its regulatory turf each year, noted Malpass, and the U.S. has cheered it on. Brazil’s socialist government is hosting the group’s 2024 meetings with three goals: promoting social inclusion, combating climate change, and reforming—i.e., expanding—global governance institutions. Adding to the perfect storm, Brazil will hand control of the G-20 to South Africa at the start of 2025, putting China, Russia and anti-Americanism firmly in the driver’s seat of global government.
What’s to prevent the United States from plunging into a severe recession – or worse?
As Mr. Malpass observed, Ronald Reagan used pro-growth policies and peace through strength to lower inflation, end the Iran hostage debacle, and restart business investment. Supply-side tax and regulatory policies empowered markets, strengthened the dollar, raised median income and sparked 17 quarters of growth over 3.5% from 1983 to 1988, with four quarters exceeding 6%. This formed the American bedrock against which Soviet socialism crumbled.
To prosper and foster peace, we need an even bigger policy upheaval now, recommended David Malpass.
David Malpass is a distinguished fellow in international finance at Purdue’s Mitch Daniels School of Business. He served as president of the World Bank, 2019-23, and during the Trump administration he was undersecretary of the U.S. Treasury, 2017-19. Click the link to read his entire article Slow Growth Is Ahead Unless Government Gets Out of the Way
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