Home Economic Trends The U.S. Economy: A Sad Reality, or Why Democracy Must Be Recalled...

The U.S. Economy: A Sad Reality, or Why Democracy Must Be Recalled – Paul Tolmachev

20 years of state expansion have led to obvious and inevitable results: the competitive environment is distorted by tying economic agents to state incentives, the government causes a full-scale “squeeze effect” by its excessive presence in the economy, both in financial markets and in the real sector, funding government programs, high social spending, and unbridled monetary expansion. These economic policies have led to the highest inflation in 40 years, and ever-increasing taxes to finance government expansion have forced business agents to cut spending and narrow their investment preferences. In other words, the state has chosen linear redistribution of goods and direct funding of demand-consumers instead of cultivating demand through incentives for supply-side growth-businesses and producers-to develop demand. 

The better the supply side feels, the better and healthier consumers will feel, organically expanding their consumption preferences and opportunities, matching them with productivity and not having unreasonable expectations. Otherwise, by getting money before they produce something, consumers form distorted expectations and preferences, which eventually turn into inflation and recession, painful blows that arise as payback for unreasonable consumption. 

In order to avoid the “wrath of the people” and not to lose sustainability, the authorities continue to expand unwarranted credit and redistribute more and more benefits from the efficient and frugal to the inefficient wasters, because there are no other options in a situation in which you constantly increase fees and tighten the environment for those who create your benefits. In such a case, you are simply forced to continually expand credit because your choice is not to encourage production and efficiency, but to increase fees by imposing ever-increasing restrictions on producers. 

To realize your “concern for citizens,” you’re always short of money, so you have no choice but to continually tighten and increase your levies while increasing your leverage. It looks like a throwback to the Middle Ages, or at best to the 18th century, to virtually bankrupt states whose authorities nevertheless spent more and more and tightened conditions for those who actually filled the coffers. This could go on for a long time, but we all remember how it turned out in the end: the example of the French Revolution is a vivid illustration of this. 

The Cotillion effect in a broad sense – getting primary access to cheap resources of the richest and closest to the budget agents with the subsequent trickle down of resources at a higher price – is inevitable in a “big state” with increasing centralization and expanding redistribution, above all worsening the situation of ordinary citizens and small businesses. A glance at the data is enough to convince ourselves of this and bid farewell to our illusions about the effectiveness of the current government’s “leftist-socialist” policies. 

The Democrats continually hide behind a record low unemployment rate of 3.5%, without mentioning the same record low labor force participation rate, which recently was just over 60% and has still not surpassed its 1977-1979 levels of 62.3%. And also that high employment with underperforming supply, side-stepped by the effects of global government lockdowns and increased tax pressures, is paving the way for intense inflation and a worsening of the real situation of ordinary citizens and small businesses. 

Average inflation-adjusted hourly earnings have fallen for the 18th consecutive month, falling 3% over the past year. This trend was formed right after the passage of the $1.9 trillion “stimulus” spending plan in March 2021. Well, the result of the “stimulus” is plain to see. 

The loss of real per capita income of Americans since the beginning of the Biden Administration was more than $4,000: the significant outpacing of wage growth by inflation has cost the average American about $3,000 in annual purchasing power in addition to more than $1,000 of loss due to tighter monetary policy and rising interest rates. In other words, the average American has become poorer by more than $4,000 during the Democrats’ time in the White House. 

These are all externalities of high inflation, triggered by unbridled monetary expansion to finance government spending and deficits, as well as increased tax and regulatory burdens on manufacturers. 

For example, more than 70% of small business owners say inflation has flattened their margins, and 50% of them do not believe inflation will drop significantly until mid-2023, forcing them to cut costs, raise prices and reduce working hours. Microsoft, JP Morgan, GAP and many other big businesses have also cut employees and curtailed some of their investment plans. But small businesses cannot cut costs as effectively as big companies, nor can they access cheap funding, which puts small businesses and entrepreneurs in an extremely vulnerable and desperate situation.

The FED certainly needs to be more decisive in suppressing inflation, not only by raising the federal funds rate, but also through reducing its hypertrophied $8.8 trillion balance sheet. Unfortunately, this is the most realistic and, in fact, the only way we can expect the government to do so. All other absolutely necessary steps to stimulate growth and development, such as cutting government spending, removing regulatory barriers, cutting taxes, squeezing social programs, and bringing monetary policy into reasonable alignment with economic growth, seem to be utopian. Recent events in Britain have shown this clearly.

But there is some hope for some reasonable steps if Republicans, who now occupy virtually half the Senate, can be more committed and persistent in stopping this unbridled state expansion that seems to have no end in sight and that seems to have become the consensus of the Democratic Party.

The state will not stop itself, but we, the voters and citizens, can stop it when we realize that the state is merely the managers of public resources, acting within the limits of its authority. Society needs to confront government managers who are consistently extending these powers. This is precisely why the civilized world has created a competitive political environment and a system of checks and balances, why liberal institutions are preserved in their stability and immutability.

This is why people created democracy.