GDP Data: Economic Recovery Continues But Policy Threats Could Derail Needed Growth

By SBE Council at 29 April, 2021, 1:15 pm

by RAYMOND J. KEATING-

Americans are a resilient bunch - including U.S. entrepreneurs, small businesses and their employees, and investors - as illustrated by the fact that real GDP growth in the first quarter of this year accelerated compared to the previous quarter's growth rate, as reported by the U.S. Bureau of Economic Analysis. The climb out of the deep economic hole dug by the COVID-19 pandemic continues - and yet President Joe Biden is serving up a series of policy measures that will only serve to restrain or slow our recovery.

Climbing Back from Pandemic Lows

First, real GDP grew by 6.4 percent in the first quarter of this year, at a seasonally adjusted annual rate (unless otherwise noted, real percent changes in the following are based on seasonally adjusted annual data). That was faster than the 4.3 percent growth rate in the fourth quarter of 2020.

Even after a big jump in growth in the third quarter 2020 (+33.4 percent), the massive declines in the first two quarters of 2020 as the pandemic hit (-5.0 percent in the first quarter 2020 and -31.4 percent in the second quarter 2020) mean that real U.S. GDP still remains below the pre-pandemic level.

Personal consumption expenditures rose markedly (+10.7 percent) in the first quarter due to reopening of businesses, as well as government aid. Looking ahead, it is critical that consumer spending is rooted in expanding business investment and jobs, and not in assorted government aid programs. After all, government aid amounts to simply redistributing resources, with real costs now and in the future, and not the creation of wealth.

There was good news on the business investment front in the first quarter.

While real gross private domestic investment declined by 5.0 percent in the first quarter, that largely was about a transient drop-off in retail inventories. Zeroing in on real fixed nonresidential investment, that grew by 9.9 percent - continuing its recovery for three consecutive quarters. In terms of major categories of such investment, equipment (+16.7 percent) and intellectual property products (+10.1 percent) grew nicely, while nonresidential structures investment continued as a negative, declining by 4.8 percent (the sixth consecutive quarterly decline). Of course, as reflected in the continuing hot housing market, residential investment grew by 10.8 percent in the first quarter.

Unfortunately, the recovery in trade stalled. Real exports actually declined by 1.1 percent in the first quarter, while growth in imports continued for the third consecutive quarter, but at a much slower rate than the previous two quarters.

It is important to note where key areas of GDP now stand compared to pre-pandemic fourth quarter 2019. As of the first quarter 2021, real business investment, residential investment, exports and imports had recovered to the point of registering higher levels than in the fourth quarter 2019. In terms of the private sector, only personal consumption expenditures in the first quarter 2021 were below the fourth quarter 2019 level.

If strong growth continues, overall GDP could fully recover by mid-2021 - which would be a noteworthy achievement - with the economy then shifting to an expansion mode. Of course, that would still leave a considerable amount of lost growth in the economy to make up for, and much work would remain in terms of job creation, which is a lagging measure.

The Policy Attack on Growth

Hence, the need to establish the best possible environment, in which the entrepreneurship and private investment that drive economic, income and employment growth can flourish, should be apparent to all. Unfortunately, President Biden's policy push would restrain or even derail our economic recovery.

● Broadly, growth would be undermined by plans to increase personal income taxes on upper-income earners;

● increase capital gains taxes;

● increase the corporate income tax;

● expand the regulatory burdens of the federal government;

● vastly expand federal spending in a variety of arenas - trillions of dollars in new spending on top of trillions of dollars already being spent;

● have the federal government engage in industrial policy.

President Biden is trying to ride the wave of vaccines working to stop this pandemic and the economy reopening in order to impose a breathtaking expansion of government seemingly in all corners of life. But Mr. Biden cannot repeal the laws of economics.

Quite simply, a vast expansion of government means draining resources away from more productive enterprises and endeavors in the private sector. That is, whether financed via more debt or taxes, more government spending crowds out the private sector.

Plus, higher taxes, such as higher capital gains, personal income and corporate income tax rates, reduce incentives and resources for starting up, expanding and investing in businesses. That, in turns, means further restraint on innovation, productivity, income and job growth.

For good measure, elected officials and their appointees do not possess the knowledge or incentives to guide or direct investment and industries.

The Biden administration also is absent in unwinding the protectionism of the Trump years and returning the U.S. to a leadership role in advancing free trade.

And finally, as almost any small business owner will tell you, the regulatory costs of government are just as real and burdensome as are taxes - indeed, often even more onerous. Gearing up the federal regulatory machine means inflicting serious harm on U.S. businesses of all types and sizes.

Current tax, regulatory and spending policies emerging from the Biden Administration are anti-growth. Let's hope that Congress possesses the wisdom to say 'no' to such misguided measures, and instead, gets focused on actually reducing governmental burdens on the true sources of growth, i.e., entrepreneurship and investment.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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