No one knows for sure what the state of the American economy will be one year from now, but the existing evidence all points in one direction: disaster.
During the widespread rollout of the COVID-19 vaccines, countless economic analysts predicted the remainder of 2021 would be marked by rapid economic growth. The most popular theory was that as the economy reopened, pent-up economic demand would lead to a surge of activity, driving expansion at a record pace.
However, despite extremely low levels of deaths related to COVID-19, new data from the federal government suggests the economy grew at a much slower pace than expected in the second quarter of 2021.
Many analysts were predicting 8.5% growth, but a report from the Commerce Department estimated gross domestic product improved by just 6.5%, a 26% difference. The Commerce Department also slightly revised down its estimates for first-quarter GDP growth, from 6.4% to 6.3%.
According to Paul Ashworth, the chief U.S. economist at Capital Economics, the economy’s disappointing performance is a strong sign that government "stimulus provided surprisingly little bang for its buck."
The economy’s relatively slow growth is a clear indicator that the Biden administration’s economic strategy of increasing employment through government welfare and stimulus programs isn’t working as expected—which should worry policymakers, considering that the Biden administration’s plans to improve economic growth in the future also rely on this same flawed thinking.
As concerning as the second quarter GDP numbers are, however, there are good reasons to believe that things could get much, much worse over the next year.
Perhaps the most important signal is that inflation has continued to drive up consumer prices. The annual growth of core personal consumption expenditures is now 3.4%, the most significant increase since 1992.
Further, the Labor Department reports that the consumer-price index increased in June by 5.4% compared to one year ago, the highest 12-month rate since August 2008. (It’s worth remembering that August 2008 was just one month prior to the start of the massive stock market crash of 2008.)
Inflation is causing everyday prices to rise, making it substantially more expensive for families to put gasoline in their cars and food on the table, and in the process, it’s helping to keep economic growth from reaching levels many thought were inevitable late last year.
For months, Americans have been told high levels of inflation are "transitory" and likely to subside in late 2021 or in 2022. But many institutions are now warning consumers that inflation could last for substantially longer than originally expected, and that it might require central banks around the world to take action.
For example, Bank of America predicted in June that U.S. inflation is likely not "transitory" and could last for up to four years.
The International Monetary Fund recently admitted in a report that there is "a risk that transitory pressures could become more persistent and central banks may need to take preemptive action."
That "preemptive action" would almost certainly involve increasing interest rates and tightening up other monetary policies that have flooded marketed with cheap cash for many years.
Altering monetary policy to help reduce inflation could very well be a responsible move to shore up the dollar and America’s financial system, but it would almost certainly dramatically reduce economic growth, because lending would become more expensive and loans would be harder to secure for many families.
If interest rates were to increase, the housing market could be one of the industries that ends up getting hit the hardest. And if the past is a good indicator of the future, a crash in the housing market could drag the rest of the economy into the gutter along with it.
To avoid a potential economic catastrophe, the Biden administration and Congress should slash unnecessary government spending, a move that would help to slow inflation, as well eliminate COVID-19 programs that are discouraging millions of people from returning to work. In May, businesses reported there were nine million job openings in the United States, a record high level.
Unfortunately, the Biden administration and many in Congress are pushing to do the exact opposite. They want to continue programs that will discourage work, and instead of reducing spending, Biden and irresponsible members of Congress are calling for massive, costly new government programs.
In addition to a $1 trillion infrastructure plan, Biden and congressional Democrats are also proposing a $3.5 trillion education, climate, and welfare package that would, among other things, subsidize child care, continue the expanded child tax credit, expand Medicare benefits, fund universal prekindergarten, and offer huge investments in "green" energy sources like wind and solar, both of which have proven to be unreliable and harmful to the environment.
By dramatically increasing government spending at a time when inflation is already a serious problem, the Biden administration and Congress would put the Federal Reserve in the very difficult position of having to choose between letting inflation run wild or imposing potentially jobs-killing interest rates hikes. Either way, American families would lose, and lose big.
The only hope of averting economic disaster is to put policies in place that would encourage, rather than discourage, able-bodied people to return to work, while reducing inflation-causing government spending programs.
Unfortunately, it doesn’t look as though the Biden administration is interested in pursuing either course.
Justin Haskins is the editorial director of The Heartland Institute and the director of Heartland’s Stopping Socialism Project.