Disappointing GDP report is a wake-up call for Democrats

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The US economy was hot in the second quarter of 2021, growing at an annualized rate of 6.5%, adjusted for inflation, and exceeding its pre-pandemic level. Good news, but there was a catch: Many on Wall Street expected a white-hot economy of 8% growth or more. Plus, that expectation comes after it has gone down in recent times. Thus, real GDP growth has not even reached this reduced target.

It’s a disappointment Washington should take note of, especially White House Biden and Congressional Democrats as they try to push through two big spending bills. If the government injects money into an economy at a level that exceeds its ability to productively meet this increased demand, the result will be higher inflation rather than more real growth. And it is growth after inflation that translates into higher take-home pay for workers.

But rising prices are eating away at these gains. Besides inflation, the economy grew at a rate of 13%, the fastest non-pandemic quarter of growth since the third quarter of 1981. But inflation made up for almost half of that increase. This is a sign that too much money can drive out too little commodity. Or as the consultancy firm Capital Economics characterized the GDP report in a morning research note: “Overall, more evidence that stimulus measures have been surprisingly unprofitable, with the economy quickly facing downturns. unexpected supply constraints, resulting in higher inflation. “

And while some of these supply constraints are temporary, the concern of economists is that if prices rise for an extended period – regardless of the nature of the initial causes – the surge will change our expectations for future inflation. And these altered expectations can become self-fulfilling if workers start demanding higher wages and companies start charging higher prices because of these beliefs.

With the size of the economy now beyond what it was before the COVID-19 outbreak, policymakers need to think about how their actions will affect both growth and inflation in the future. to come up. From this perspective, the progress made on the bipartite $ 1,000 billion infrastructure bill is therefore encouraging. Of this amount, some $ 550 billion would be new spending, including $ 110 billion for roads, bridges and major projects; $ 66 billion for passenger and freight rail transportation; $ 39 billion for public transit; $ 65 billion for broadband; and $ 17 billion for ports and waterways.

That’s a lot of money, even spread over a decade, but the goal is to boost the long-term productivity of the economy by improving both physical and digital connectivity. Better infrastructure makes it easier for atoms and bits to move from here to there. And by stimulating the productive or “supply” side of the economy, sustained inflation is less likely to become a chronic problem.

The other bill that Congress is working on may prove to be more problematic. Anything that comes close to the $ 3.5 trillion social spending plan (including education, child care, climate change, paid family and medical leave) risks escalating current inflationary pressures by injecting even more money into a supply-constrained economy. That’s why if moderate Democrats succeed in reducing that amount, it could help prolong this recovery. The last thing we need is an inflation shock that forces the Federal Reserve to raise interest rates and eventually halt the expansion. Whatever good Democrats think their social spending will do, a lot could be offset by a recession and rising unemployment. Although the pre-pandemic expansion has been historically slow, it has been long. And in the end, wages were increasing in all areas, even for the least qualified.

Yet if America is to experience another wild year of rapid and sustained growth, much of the heavy lifting will come from the private sector. And there has been a lot of good news about it, even over the past couple of weeks. Hey, poke fun at uber-billionaire Jeff Bezos and his provocatively shaped rocket if you have to, but the billionaire ‘space race’ is helping to advance the technologies that will be essential to creating this world. ‘a multi-billion dollar economy in space. Google-owned AI firm DeepMind’s recent announcement that its AlphaFold algorithm can confidently predict protein structures could lead to new drugs or climate-resistant crops. Then there’s the Wall Street report that startup Form Energy may have found the “holy grail” of the renewable energy industry: a cheap battery that provides long-lasting energy storage for grids.

To make the most of these and other innovations, America needs an efficient infrastructure system, but also a stable macroeconomic environment. Unfortunately, Washington is focusing too much at the moment on the former rather than the latter. Maybe this disappointing GDP report will help change that outlook.

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