The economy may already have

Shoppers wait in line to enter a Prada store in the SoHo neighborhood of New York, August 25, 2021.


Juharat Pinyodoonyachet / Bloomberg News

Imagine if the Biden Administration were as focused on the pandemic as it was when it took power a year ago. Get the vaccine out, accelerate Covid therapies and let an economy ready to grow on its own. There was no $1.9 trillion “relief” bill in March, no threat of new tax hikes and spending to “transform” American society.

Is the economy healthier today, with less inflation, fewer shortages, and more consumer and business confidence? We’ll never know, but there’s a strong case for thinking so, when we look at Thursday’s report from the Bureau of Economic Analysis that GDP grew 5.7% in 2021.

That’s the fastest annual growth since the 1980s, but the post-pandemic recovery is always on. Politicians shut down the economy for much of 2020, then poured cash into consumers’ pockets to compensate, and the Federal Reserve poured more money into the economy. A boom for the ages is poised to happen in 2021, and the Biden Administration will no doubt take note.

In that case, the economy in 2021 is not growing as fast or in a healthy trend as it should be. That is clear from the details of growth in the fourth quarter. Top growth was a very strong 6.9%, accelerating from 2.3% in the third quarter impacted by the rise of the Delta Covid variant.

But by far the biggest contributor to GDP (4.9 percentage points) is the accumulation of inventories. This means retailers and other businesses have stocked up on empty, unsold shelves. There will likely be more inventory build-up due to shortages across the economy, but the Q4 gain is unsustainable.

Consumer spending contributed 2.25 percentage points, but most of that came from spending reducing the savings accumulated from all that government gives adults. The personal savings rate fell to 7.4% from 9.5% in the third quarter. Real disposable income, after inflation, fell 5.8% in the fourth quarter after falling 4.3% in the third quarter. The high consumption curve from government transfer payments will gradually decrease as 2022 begins.

The White House praises the GDP growth numbers, but if the timing is so good, why do the polls score the economy so low and Biden so low? The best explanation is inflation, which is at 7% in the consumer price index. Even the Fed’s preferred measure of inflation – personal consumption spending – grew at an annualized rate of 6.5% in the fourth quarter, accelerating from 5.3% in the third quarter. Real wages after inflation are falling for most Americans, even though businesses are paying more to retain scarce workers.

This is where a focus on Covid strategy will come in handy. The March spending cut sent demand skyrocketing amid historic supply shortages. Uncertainty from the proposed Better Back Construction tax hike and vows to punish business with newly added regulations caused supply problems. All of this was unnecessary policy blunders because Keynes’s advisers focused solely on economic needs and because of President Biden’s desire to please the Democratic left.

It’s not too late to find out, and the best policy course now will be for Mr. Biden to do nothing. Dumping the BBB, eliminating regulatory schemes would increase costs and prices, and reduce hostility towards domestic and export energy. Let the Fed take over inflation. The US economy has significant rebounding power when the political class gets out of the way.

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Appears in print edition January 28, 2022. The economy may already have

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