U.S. GDP Disguises Economic Reality

What’s Really Going On?

However, despite this reported economic growth, a significant proportion of middle- and working-class Americans perceive no tangible benefits. According to a November 2023 Financial Times poll, 55 percent of Americans feel financially worse off. This sentiment varies along party lines, with 82 percent of Republicans expressing financial dissatisfaction compared to 31 percent of Democrats. Surprisingly, nearly half (46 percent) of Democrats report “no change” in their financial condition under the economic policies associated with President Joe Biden, leaving only a quarter who believe in the positive impact of these policies.  

Setting aside political differences, the question arises: why do so many Americans feel economically disadvantaged in a growing economy? The answer lies in the diminishing purchasing power of Americans, a consequence of inflation. While headline inflation moderated to 3.2 percent in October, certain crucial categories such as housing and transportation continued to experience high single-digit increases (6.7 and 9.2 percent, respectively). Over the past three years, Americans have endured persistent price inflation, resulting in a nearly 20 percent loss of purchasing power since 2020. 

This erosion of purchasing power becomes more pronounced when considering the broader picture. Since 2020, Americans have lost nearly 20 percent of their purchasing power, equivalent to what cost $1.00 now costing $1.21. Prices in critical categories like energy remain over 70 percent higher than three years ago. A two-decade trend of “moderate” inflation, driven by the tripling of the monetary base, has led to a 45 percent reduction in the value of the dollar since the turn of the century, contributing to a pervasive sense of financial strain among most Americans. 

Other Factors

Another factor contributing to the widespread perception of financial hardship is the source of GDP growth. In essence, Bidenomics relies heavily on fiscal stimulus, marked by increased government spending on initiatives such as the Inflation Reduction Act, the Infrastructure Bill (with limited relevance to actual infrastructure), and the CHIPS Act. The third quarter saw a 7.0 percent increase in federal government spending and an 8.2 percent rise in national defense spending, supporting the 5 percent GDP growth, while consumer spending lagged at 3.6 percent. 

This reliance on government spending, particularly on defense and entitlement programs, has come at a significant cost. In 2023, the cost included a $1.7 trillion deficit funded by new debt carrying an interest rate of nearly 5 percent. With the total national debt nearing $34 trillion and annualized debt service costs at $1 trillion, concerns are growing among debt buyers about real (after inflation) returns. This growing supply/demand gap is expected to necessitate higher nominal interest rates, around 5 percent, intensifying interest costs for the federal government and leading to the issuance of trillions of dollars in additional debt in the coming months. 

In summary, the current appearance of robust economic growth masks an impending debt crisis. The notion that sustained economic growth can alleviate the debt burden amid trillion-dollar deficits is deemed unrealistic. Addressing this situation requires more impactful measures.