The Atlanta Fed’s advance estimate of Gross Domestic Product for the first quarter has recently turned sharply negative, to caterwauling glee from the usual suspects in the media and the Blob. Their rapture is economically irrational; GDP was deliberately designed to include government spending, thus flattering orgies of waste such as the Biden administration. It is far past time to turn to Gross Private Product, a measure that reflects only those outputs with measurable value in the market. On that measure, the picture for 2021-25 is much grimmer and that for 2025-29 will be brighter than on the official cooked statistics. Hopefully the voters in November 2026 and 2028 will notice their additional well-being and distribute their favors accordingly.
First let it be said that after three terms of Presidents Barack Obama and Joe Biden and a first term of Donald Trump that never got control of the bureaucracy, I now do not trust U.S. economic statistics and suspect the books have been cooked. You can see this when you look at long-term comparisons of the GDP breakdown. The line “Government consumption expenditures and gross investment” in the National Accounts is lower in 2024 than in 2019, at 16.91% of GDP compared to 17.38%. Go back further and the comparison is even more startling; it was 20.18% in 2005 and 22.61% in 1995, when President Clinton was saying “the era of big government is over.” Quite clearly, the bureaucracy has been fudging the figures for government expenditure, trying to pretend it is all under control, when in reality it is growing like a weed. It is not possible to be a sentient being in the U.S. and believe that government has shrunk by a quarter relative to GDP since 1995.
This makes the analysis of GPP that this column did at my first attempt in 2003 very difficult. Whereas the Bureau of Economic Analysis (BEA) and the Congressional Budget Office (CBO) agreed in 2003 that government spending was around $2 trillion (albeit on different definitions of what was included), their figures have now sharply diverged. The most recent figure from the BEA puts government spending at $3.9 trillion, whereas the CBO, sadly forced to account in real money and not economic abstractions, puts fiscal 2024 spending at $6.8 trillion. There is no question which is right; the CBO figure matches against income of $4.9 trillion to give the $1.9 trillion budget deficit problem which we are now sadly experiencing, whereas if the BEA figure were correct, the U.S. would be running a $1 trillion budget surplus!
There are some explicable roots for this dichotomy. The CBO includes transfer payments such as Social Security, whereas the BEA leaves them out, reasonably enough since that money is eventually spent by the recipient in the private sector. That works fine for Social Security, but not for Medicare and Medicaid, also left out of government spending by the BEA. Those items represent payments for medical services, albeit laundered through actuarially unbalanced insurance schemes; they thus resemble payments for bombers or consultants, which are included in the BEA’s government spending figure.
Since Medicare and Medicaid payments have vastly increased as a percentage of GDP, through the bloating of medical costs and in Medicaid’s case, through a huge volume of fraudulent claims, especially under Biden, this has increased the gap between the BEA’s spurious figure and the CBO’s more accurate one. We do not need to assume more than simple sloppiness as an explanation of why the figures have diverged, though it may not be the only one. We can also note that, as DOGE gets Medicaid fraud under control, reported private sector GDP will decline, an anomalous result, though not one missed by Maynard Keynes, who pointed out the GDP-boosting virtues of embezzlement in his “General Theory.”
To assess the behavior of Gross Private Product, we should therefore take the BEA’s figure for Gross Domestic Product and subtract the CBO’s figure for public spending for the four quarters ended in September, the government’s fiscal year (in practice, it’s easier to use GDP for the calendar year; this introduces a small additional inaccuracy into something that is inaccurate anyway). The resulting GPP should then be deflated by the year’s GDP deflator.
When you do this, you discover that Joe Biden’s Presidential motto should have been “Honey, I shrunk the economy.” Real GPP declined by 16.5% — about a sixth – between 2019, the last pre-COVID year, and 2024, from $15.65 trillion to $13.06 trillion (at 2017 prices). Little wonder that Americans were feeling impoverished by the end of Biden’s term, whatever the performance of government-bloated GDP, much of which was fraudulent, as we are now discovering. Even in the last year from 2023 to 2024, after the COVID-19 pandemic had passed, real GPP declined another 3.4% while GDP increased as the government bloated in size by another 10.5% in real terms. This is the real measure of Biden’s authoritarian socialism and ineptitude, and it is also a real measure of how far DOGE must go in wiping out government excess – a mere trillion dollars per annum in cuts won’t do it.
There are further anomalies in current GDP statistics, which I have discussed previously. Unemployment is today allegedly low at around 4%, but that does not take account of the 21 million illegal aliens who have swarmed into the economy. Many of those have illicit jobs, driving out the domestic population – while total jobs increased about 1 million in 2024, more than 100% of that increase was absorbed by the foreign-born; domestic workers lost employment on a net basis. Similarly, the relatively favorable productivity figures of 2023-24 do not take account of the hidden bloating of the denominator of that calculation through illegal aliens working without being counted in workforce statistics. Finally, price statistics since 1996 have included a spurious “hedonic” factor depressing reported price increases and increasing reported GDP by about 1% per annum.
While some of the increase in the labor force has been absorbed in government, when you combine the true GPP statistics with the workforce statistics, even ignoring the hedonic factor, you realize that under Biden, productivity dropped like a rock, probably by at least 10%, as his idiotic regulations and boondoggles made the U.S. less and less efficient as an economy. Pete Buttigieg’s electric chargers program, in which $7.5 billion was spent and somewhere between 8 and 30 chargers delivered, is an example of how regulation and government mismanagement destroys productivity if accounted for correctly. The California High Speed Rail program, 30 years old last month without a single passenger carried, is another such example. Increase the resources devoted to those kinds of programs, and only the dodgiest of accounting can hide the productivity disaster they produce.
Simon Kuznets (1901-85) who first propounded the Gross Domestic Product in 1934 (looking primarily at its Gross National Product sibling) was for almost all his career (1927-60) employed by the National Bureau of Economic Research, a government body. He was therefore keen to see government output given maximum value in the GDP, so that the first bloat of government that was occurring under the Roosevelt administration would add to reported wealth, rather than detracting from it as was the reality. He did this by including government output at cost, so that every extra bureaucrat salary increased it, regardless of that bureaucrat’s economic value.
Kuznets’ statistic was so successful that in 2011, another Nobel-winning leftist economist Paul Krugman proposed that the U.S. government should announce an entirely fictitious threat of invasion by extraterrestrials so that money could be wasted on developing defenses, thereby boosting reported GDP in the lackluster Obama economy. (I wrote about it here).
The time has come to eliminate this government-boosted madness – I note that Elon Musk has recently suggested the same thing. If you look at Gross Private Product, and you do not allow the government statisticians to obfuscate by including Medicaid fraud in private sector output, you discover that the Biden era saw a sharp decline. Ordinary people felt this, which is why despite the whining of the mainstream media, they elected Trump. It is to be hoped they will be equally sophisticated in assessing an era of deregulation and government-cutting under Trump, which will very likely result in declining GDP, but may well make everybody richer even in the short run. That will require ordinary people to be cleverer than pundits and economists — surely a reasonable bet!
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)