Category Archives: Business Cycles

On the Radio: Unemployment Numbers

Today at 5:45 CT/6:45 ET, I’ll appear on the Lars Larson show to talk about today’s new unemployment numbers release, and what policies can strengthen the economy going forward.

For the short version, see this press statement from CEI, or a short article quoting me in Reason.


Sorting Out Some Confusion on Trade and GDP

While inflation is the biggest economic problem right now, trade policy is another reason why GDP shrank last quarter. It is also a common source of misunderstanding. This post attempts to clear some things up.

University of Central Arkansas economist Jeremy Horpedahl notes two overlooked factors in today’s bad GDP news: 1) a decline in government spending and 2) a decline in net exports.

The spending decline was expected, as temporary COVID spending programs have begun to expire, though other big spending bills will partially take their place as the infrastructure bill and other recent trillion-dollar packages begin paying out over the next several years. While this can cushion short-term GDP numbers, those government spending projects will create less value on average than alternative private uses of those resources. Short-term stimulus means long-term harm.

The decline in net exports is more complicated. The Trump-Biden tariffs and the retaliations they sparked put a damper on global trade even before the pandemic. They added to existing friction points in trade, such as excessive regulations on ocean shipping, ports, and trucking.

As things go back to normal, the supply network problems exacerbated by these policies are still being untangled. If Congress and the administration are looking for ways to boost growth without raising spending, they should liberalize trade and reform regulations.

GDP measures how much stuff people create. Trade regulations block people from making stuff, often for no good reason. Moving toward freer trade would boost GDP in both the short and long run.

Trade also confuses some pundits. There will be talk on economically illiterate cable news shows about how America’s trade deficit is causing today’s economic troubles. As usual, those pundits should be ignored. Economists going back to Adam Smith know that the trade deficit has nothing to do with economic health. It is neither good nor bad. For example, Russia’s economy may shrink this year by as much as 45 percent, but it has a massive trade surplus. In America, the trade deficit went up throughout the gangbusters growth of2021. It tends to be highest during booms and lower during recessions.

Americans buy all those imports with dollars. Foreign sellers in China or Japan can’t use dollars at the grocery store—so they send them back to America. Some of those dollars buy American exports. Most of the rest goes to investments in American businesses and government bonds. Every dollar of trade deficit is a dollar of capital surplus. It’s a wash. People spend their dollars one way instead of another, but they get spent just the same. It doesn’t matter for GDP.

The only reason net exports are in the GDP equation is to avoid double counting. When an American buys a foreign import, she first has to earn the dollars to pay for it by making something here in America. That earlier production was already counted once in GDP. Similarly, exports count toward GDP, even though Americans don’t consume the final product. Exports are the price we pay for imports. Any imports beyond that are paid for by cash earned from other domestic production that doesn’t get exported, and was already counted in GDP.

As with most other issues, do not listen to hysterical, hair-pulling cable news pundits on trade deficit issues. The economy has serious problems, but the trade deficit is not one of them. Policy makers should instead focus on liberalization—perhaps starting with repeal of the Jones Act.

GDP Shrinks: The Good and the Bad

The advance estimate for 2022’s first quarter gross domestic product (GDP) is in, and the news is not good. Adjusting for inflation, GDP shrank 0.4 percent from the previous quarter. If GDP stays on its current path for the entire year, the economy would shrink by 1.4 percent. A revised estimate will come out on May 26, but likely won’t be much different. Let’s unpack some of what today’s news means.

The big news is that the economy is at a high risk of recession. The standard definition of a recession is when GDP shrinks for at least two quarters in a row. We may even be in one now, though we won’t know until next quarter’s results arrive in July.

The other big news is that the Fed’s inflation-fighting job just got more difficult. The reason inflation is high right now is because the money supply is growing faster than GDP. If they were growing perfectly in sync, inflation would be near zero. Right now they are mismatched because the Fed attempted to stimulate the economy during the worst of COVID with a flood of new currency. At a technical level, inflation is easy to fix. It’s a matching game—just match money supply growth with economic output growth.

The difficult part is that tapering back inflation risks causing a recession, and we’re now officially halfway there. The Fed has been criticized for being too timid about inflation, and in my opinion rightly so. But if you’re wondering why it’s been timid, there’s your answer.

Fortunately, today’s GDP numbers aren’t on the Fed. Changes in monetary policy have a lag time that ranges from six months to as long as a year and a half, and the Fed took no action on inflation until March, when the first quarter was nearly over. But going forward, that gives the Fed an excuse for inaction. While that might prevent some short-term harm during an election year, it comes at the cost of even greater long-term harm from sustained high inflation.

Fed Chair Jerome Powell recently indicated that the Fed will take more aggressive steps starting at its next Board of Governors meeting in May. But with today’s news, will he keep that promise?

That’s the bad news. But there are some good points. The big one is that the economy is already roughly back to where it would have been if the pandemic had never happened. Last year’s breakneck growth, which peaked at 7.0 percent, was mostly catch-up growth. It caught us up to where we were going to be anyway.

The economy was mostly healthy going into the pandemic. There was no housing bubble or financial crisis. People hunkered down when COVID hit, and they opened back up when they felt it was safe. So, 2021’s rapid catch-up growth makes sense. The COVID recession wasn’t a true downturn, so much as a pause. Slower growth is a sign that things are finally getting back to normal. That’s a good thing!

That said, a shrinking economy in real terms is never a good thing. Real GDP data go back to 1947. Over the last 75 years, average annual real growth has been a little over 2 percent. If we’re caught up after the pandemic shock, we should expect growth to slow down to that 2 percent ballpark. Since the economy is shrinking, something else is going on in addition to that expected catch-up slowdown.

In sum, GDP growth was going to slow down no matter what, because the economy is now largely caught up from the COVID shock. But the fact that it actually went negative is due to a mix of factors. Inflation is the biggest one, and today’s GDP news may make them more reluctant to fix the problem they caused, especially during an election year. That is a cause for concern.

Part of the GDP reduction is from expiring COVID spending programs, and is actually good in the long run. Even most of the COVID spending bills’ supporters did not intend for them to become permanent. Russia’s invasion of Ukraine is having a small negative effect on the American economy, but is only a small part of the story, and mostly restricted to energy prices. Illiberal trade and regulatory policies are a bigger issue, which the pandemic exposed. These have mostly not been fixed, and are dragging down the economy. Congress and the Biden administration can help by liberalizing trade and regulation and allowing the Fed to do its job of reining in inflation.

On the Radio: Economic Recovery

Earlier this week I appeared on the Vermont-based Common Sense Radio with Bill Sayre. We talked about the latest economic indicators, the economic recovery from COVID, and other issues. If I see a link to the audio, I’ll post it here.

Thankful for Good Economic News on Jobs, Consumer Spending: More to Do

This statement originally appeared on

During Thanksgiving week, jobless claims dipped to 199,000, their lowest level in 52 years, when the country’s population was less than two thirds of what it is today. October consumer spending grew 1.3 percent, leading to optimism about a strong holiday season. CEI senior fellow Ryan Young comments:

“It’s nice to have two bits of good news going into Thanksgiving. Jobless claims are back below 2019’s pre-COVID levels, and consumer spending increased in October enough for retailers to expect a healthy holiday season. This provides more evidence that the economy is mostly healthy, but for COVID. The more we beat back the disease with vaccines, the more people feel safe opening up. Washington’s big spending bills, which won’t begin spending money in earnest until next year, were never needed in the first place.

“There are still notes of caution. Inflation remains high, and all that deficit spending will likely make it a few tenths of a percentage point worse for several years going forward. This will make the Fed’s inflation-fighting job even more difficult. It is also possible that October’s big consumer spending increase was a reaction to clogged supply networks. People may be doing their holiday shopping early in anticipation of longer shipping times and possible shortages. To the extent this is the case, people aren’t necessarily spending more, they’re just spending earlier. In the meantime, Congress and President Biden can help by spending less, and removing trade barriers and regulatory sludge that are distorting supply networks and clogging ports.”

Jobless Claims Just Fell, but Government Barriers Remain a Problem

This press statement was originally posted at

The number of new jobless claims fell below 300,000 for the week ended Oct. 9 — the first time since COVID-19 hit. Continuing claims fell to 2.59 million people, also the lowest level since the pandemic, but still slightly higher than average. CEI Senior Fellow Ryan Young credits increased COVID safety and a decline in government benefits and urges governments to do more to reduce barriers and resist the urge to splurge:

“One reason for the decline is expiring benefit program extensions, although the number of job openings remains at record levels. While economic fundamentals are in decent shape aside from inflation, the economic recovery is not in the clear just yet.

“The single biggest factor in the recovery has nothing to do with politics or policy—it’s COVID safety. People open up when they feel it’s safe to do so, and they close back up when they don’t. This explains a lot of the yo-yo effect in economic indicators since the pandemic began. Vaccination rates are not yet where they need to be to prevent or slow the spread of new variants, and the FDA has yet to approve promising new treatments, such as vaccines for children under 15 and a pill that can be taken at home.

“There is still plenty that policymakers should do, though. They should scrap the big infrastructure and spending bills. Not only would these add to inflation and debt, they would take enormous amounts of resources away from consumers and capital-needy businesses, and spend them on political projects instead.

“Permits, licenses, and other barriers make it difficult for businesses to adapt to COVID-era conditions and hire new employees. Trade barriers are contributing to supply chain problems that could put a damper on holiday spending. Lightening these loads would improve people’s lives as well as economic indicators.”

Disappointing August Job Gains Tied to Covid Restrictions, Politics

This press release was originally posted at

Competitive Enterprise Institute experts commented on today’s disappointing news about August job gains, urging policy makers to reject restrictions and politics and look for ways to lift barriers to economic recovery.

Sean Higgins, CEI research fellow:

“Friday’s Labor Department report that the nation gained only 235,000 jobs in August was well below the gains of the previous months and proof that re-instituting Covid-related restrictions has created a serious drag on the recovery. Prior to August, the economy had been growing by more than a half million jobs a month. The department’s report is a reminder that there is a stark cost to restrictions and officials must be mindful of broader consequences. The economy has been resilient so far, but that was partly because the end appeared to be in sight. New uncertainty is undermining that.

“The number of people who reported being unable to work for pandemic-related reasons was 5.6 million, an abrupt rise of 400,000 in a single month. The leisure and hospitality industry, usually the first to feel the effects of covid-related policies reported no gains in August due to a loss of 42,000 jobs in restaurants and bars wiping out all other gains. That’s a serious blow to people who have already endured a year and a half of difficult times.

Ryan Young, CEI senior fellow:

“Covid’s delta variant is showing up in economic statistics now, not just health statistics. Payrolls are still growing, on net, and will likely to continue to grow for the rest of the year. But that growth will be slower than it otherwise would be, in part because some people simply insist on turning vaccines and masks into political issues. Today’s tendency to turn everything into a culture war bears a lot of the blame for low vaccination rates. This in turn makes people more reluctant to travel, dine out, and attend events, which is where a lot of vulnerable jobs are being lost.

“There isn’t much policymakers can do about cultural attitudes, since mandates tend to backfire; but there is plenty they can do to roll back regulatory, licensing, and financial regulations that are blocking businesses from opening, staying afloat, or even expanding. Policymakers can also restore confidence by walking back unnecessary multi-trillion dollar spending projects that have more to do with politics than economic recovery.”

Consumer Spending, Personal Income Growth Hinge on Combating Covid Delta Variant

This press release was originally posted at

The federal government today released July data on consumer spending (slower growth compared to June) and personal income growth (higher than expected). CEI Senior Fellow Ryan Young says reducing the Covid risk through vaccines and mask-wearing is what will help economic and income growth most – not ramped up spending by Washington:

“Consumer spending grew in July, but that growth was down two-thirds from June. Personal income growth was higher than expected, though that number was inflated by government assistance and other temporary policies. The most likely reason for the slower growth is the rise of COVID’s delta variant. The extent to which people feel safe doing normal activities has more to do with COVID than with anything else, including grand political plans to spend and stimulate.

“The recovery would be much easier if people were not so eager to make everything a political issue. Vaccines and masks are tools to fight the virus, and their effectiveness has nothing to do with red-team-blue-team culture wars. Politicians from both parties who are using the virus as an excuse to enact pre-existing policy agendas are hurting both the economy and the virus response.

“The best COVID response going forward, though it lacks the drama of a cable news shouting match or another headline with the word ‘trillion’ in it, would be a little prudence, both at home and in Washington.”

Jobless Claims Drop to Pre-Pandemic Level but Congress Spending Binge Threatens Recovery

This news release was originally posted at

The federal government today reported a drop in seasonally adjusted initial unemployment claims to the lowest level for this average since March 2020. CEI Senior Fellow Ryan Young expressed confidence that two pandemic recovery milestones will bring greater gains but also pointed to a big problem on the horizon: a spending binge by Congress.

Statement by Ryan Young, CEI Senior Fellow:

“Jobs are continuing to come back, and the near future also looks good, thanks to two milestones. One, the number of vaccinated Americans crossed 200 million, bringing the country closer to herd immunity. Two, the new school year is beginning, which will allow more parents to resume working if they choose; there are still plenty of openings. COVID’s delta variant clouds matters, but the more people who get booster shots, the less harm it should cause to people’s health and pocketbooks.

“The continued strength of the recovery continues to show how unnecessary Congress’ planned spending binge is. If Congress presses forward on the infrastructure bill and its other trillion-dollar plans, it will be less about doing good, and more about handing out political favors and not wanting to admit that their pet economic theories about stimulus are wrong.”

New Inflation Numbers: Still High, Still Fixable

July’s inflation numbers are out. The annualized Consumer Price Index came in at 5.4 percent, compared to a 2 percent target. The month-to-month increase was 0.5 percent, an improvement over June’s 0.9 percent. While a return to 1970s stagflation is almost certainly not in the cards, inflation is still too high. Congress and President Biden should act now to keep it in check.

This appears unlikely at the moment. As of this writing, their latest trillion-dollar spending bill is in the process of clearing the Senate, though it will likely face friction and delay in the House. Assuming the bill does pass, it will nudge inflation upwards in future months while doing little to help the economy. Fiscal discipline in Washington is currently about as popular as the plague, but that does not change the need to reduce deficit spending. Economic recovery depends on increasing vaccination rates, not more politically motivated spending.

Politicians also need to respect the Federal Reserve’s independence. Higher interest rates are necessary to keep inflation low—but they also make government debt more expensive. President Biden and other political officials should resist the urge to pressure the Fed to keep rates low, and should spend less instead. Political meddling in central banks is how inflationary debacles like in Argentina happen. While the Fed has its flaws, it can do a good job of keeping inflation low—if it’s allowed to.

Other price increases have nothing to do with inflation (see my recent post on what inflation is, and what it isn’t). These price increases also deserve attention.

Trade barriers from both the Trump and the Biden administrations are upsetting supply chains. Above and beyond inflation, protectionist trade policies are increasing prices for cars and houses, and are largely responsible for computer chip shortages. Occupational licenses are keeping honest people out of work. Excessive regulations and permit requirements are blocking new ideas and projects that could push product prices down. Financial regulations are keeping capital away from small businesses that could use to it grow and compete against bigger companies. Energy policy restrictions are raising prices across the economy.

It is not enough to do simply do something. It is important to do the right things. Today’s policy mistakes are likely not enough to topple the COVID-19 crisis recovery, but they will slow it down, for no good reason. Fortunately, there are lots of sound policies that can hold down inflation while boosting the COVID recovery. Many of them are in CEI’s most recent Agenda for Congress.