Moneybeat: We haven’t spent our way into economic growth

MARY REICHARD, HOST: Coming up next on The World and Everything in It:

The Monday Moneybeat.

NICK EICHER, HOST: It’s time to talk business, markets, and the economy with financial analyst and adviser David Bahnsen.He’s head of the wealth management firm The Bahnsen Group and he’s here now.

David, good morning!

DAVID BAHNSEN, GUEST: Well, good morning. Good to be with you.

EICHER: Well, you know, David, it’s really hard to say what the big story of the week was, it was pretty quiet. Although I guess with the new CPI and PPI coming out consumer prices and producer prices for July, maybe those indexes were the biggest news, what do you say?

BAHNSEN: Yeah, it’s a good point. It did seem like on the economic and finance side it was a little bit slower of a week, even though it was a rather robust week in a lot of the political news cycle. I do think the CPI report was the main event of the economic week. And then you had the PPI on Friday. So both the consumer prices and producer prices are more or less reporting as was expected.

I actually thought the inflation number might tick up a little bit higher than it did just based on what happened with oil prices at the end of July, but I think a lot of that data didn’t get captured in time. It came a little too late in the month. Some of the higher gas prices that we’ve actually seen over the last few weeks weren’t necessarily captured. But you know, Nick, the CPI number has still so dramatically over-reported their shelter number that it’s still indicating close to 8% year over year inflation in rent prices. It is just so disconnected from reality that—I think at this point—most people are looking at the actual year over year CPI number as much closer to 2% even though it’s not quite there yet.

The one thing that I want to point out is that we’re so far past that really severe inflation dynamic that kicked in across the board two years ago when the world was shut down and then reopened. Pretty much all prices were going higher, that now is settled into a place where people just need to be used to the fact that whatever the number averages out to, within that number you will have things like airfare prices and used car prices dropping significantly. But then you have auto insurance going up quite a bit, and certain food items going up, so we’re not looking at something monolithic with a kind of general price level either going up or going down. But you’re getting there because there’s all kinds of different things getting pulled in different directions. Somehow, the average number is supposed to mean something to us.

EICHER: David, you mentioned politics eclipsing the regular news cycle, including stories on markets and economics, and I think we’re at the point where that’s just going to be our life for awhile. But I guess I’m a little surprised that on the political side, the Biden re-elect team is still trying so hard to provoke a conversation on the economy.

BAHNSEN: I’m not sure I understand the politics of what they’re doing completely. I don’t think that anyone will look at the data—and right now the polling data, the way the American people perceive things, is kind of all that matters here—and say, ”Hey, President Biden should run on the basis of how popular he is on the economy.” He really isn’t.

We have had 1.3% GDP growth throughout his presidency per year. We’ve had 1.6% for the 12 years before that, so all of it is really subpar economic growth. Any president who’s going to run on economic growth needs to have a 3% rate or higher, not 1%. So I think that we’re just not getting great economic growth.

He obviously was struggling with the inflation factor for a good portion of time. I don’t think that’ll be the predominant story that weighs around his neck throughout the election. I think that it’s more just going to be like, “Look, the spending has been out of control. And we don’t have a lot to show for it. It isn’t like we’ve spent our way into economic growth.” The politics and the economics are all going to have a way of really coming together in 2024.

EICHER: You know, it’s interesting, so a little over a week from now, we’re expecting a debate among the Republicans running for president, and if the politics and the economics are going to be coming together as you say, what would you hope to hear from the GOP that’s constructive. That would be a valuable conversation to have?

BAHNSEN: Yeah. And you worded the question well by saying a constructive conversation about economics, because that’s not what’s going to happen, right? Like constructive is what I care about, what I think our listeners care about, what you care about. But you know, in terms of a debate, they’re probably going to keep things very superficial and look for zingers and opportunities to score audience points. Constructively, what I wish the terms of debate were is who is going to tackle those various structural things that are impeding economic growth. And who is willing to say that at the top of that list is excessive government spending and excessive government indebtedness.

By the way, that’s going to have to include a conversation about entitlement spending—not cutting people who are receiving Social Security checks tomorrow, but rather longer term reforms that are going to make the promises that have been made more keepable, and the system itself more solvent. This is a tough thing for the Republican side right now; there has not been a good track record with the last two Republican presidents when it comes to spending and debt.

That has to be the terms of the debate. If you’re going to have a real conversation about the economy,  you have to address the fact that we have subpar economic growth because the public and governmental sector is crowding out some of the more productive parts of the private sector, and it’s doing so through excessive spending. We’ve made long term commitments and transfer payments, social safety net entitlements that represent over 60% of federal outlays, and we’re not funding it adequately. What are we going to do about that?

Now, politically, I understand, Nick, all those things are messy. I’m not here to make it simple for any of the candidates. But yeah, this is the world I live in: Where you have to be able to talk about this stuff. And for whatever reason, the voters keep letting the politicians off the hook on this stuff. The Fed is going to be a part of that too, by the way. If one believes, as I do, that we have depended too much on the Federal Reserve to play too big of a role in the administration of our economic affairs, someone’s going to have to address how maybe what they’re doing is over-reacting when they’re tightening policy right now and how they spent so many years making policy overly accommodative. They’ll have to address what that did to long term economic growth and how challenging the framework was as a result of their policies. So the Fed spending and indebtedness: By the way, all of those things funnel up into the impact on economic growth. Those, I think, are the primary issues.

EICHER: Ok, David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group … you can keep up with David at his personal website, Bahnsen-dot-com. His weekly Dividend Cafe is at dividend-cafe-dot-com.

Thank you, David!

BAHNSEN: Thanks so much, Nick.

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