Economic growth in 2023 far exceeded economists' expectations. Did the Fed plan for a “soft landing” while keeping inflation in check? And is the economy as strong as growth rates suggest the Biden administration claims?

Real GDP growth in the fourth quarter was 3.3%, bringing the annual growth rate to 2.5%. The latest quarterly numbers are still subject to revision, but any adjustment is unlikely to change the 2023 growth rate by more than a tenth of a percentage point.

I don't make economic predictions and try to avoid predictions. However, blue-chip economic forecasts are for -0.1% growth, and Bloomberg Economics said there is a 100% chance of a recession. We're making weather forecasters look cool here!

The 2023 forecast may reflect economists' continued reliance on the Phillips curve. The Phillips curve shows a trade-off between inflation and unemployment, suggesting that lower inflation increases unemployment and causes a recession.

Many objections have been raised to a stable Phillips curve. Currently, this curve is seen only as a short-term trade-off, and perhaps only for unanticipated changes in inflation. Fed Chairman Jerome Powell has belatedly committed to curbing inflation, so a decline in inflation in 2023 was not unexpected. The only people who were surprised by this growth may be economists who have always believed in the Phillips curve.

But does 2.5% growth accurately reflect rising living standards? The Unleashing Prosperity Commission observes that government spending drove more GDP growth than the private sector in 2023 . First, a note on definitions. Only government purchases of goods and services are counted in GDP, and transfer expenditures contribute to GDP when spent by recipients.

The government's GDP growth rate was 19% in 2023 and 17% in 2022. Why is this important? GDP values ​​private spending at market prices, but government spending at cost. Every purchase of a car, bed, or food provides consumers with value at least equal to the purchase price. If 1 million government dollars were spent on a slow and rarely used EV charging station, GDP would increase by 1 million dollars, but its value would probably be only 400,000 dollars.

Government activities can distort economic statistics in two other ways. Government hiring is driving an increasingly robust labor market. This economy will add 2.02 million jobs in the private sector and 672,000 jobs in the government sector in 2023. This translates into three additional private sector jobs for every new government job. In 2022, 16 private sector jobs were added for every new government job. All jobs in the private sector create value equal to the salary paid to a company, but jobs in government do not necessarily create value.

Compulsory government purchases can distort GDP, but an explanation is needed as to exactly how. California's net-zero efforts include eliminating gas-powered yard tools. Suppose the state requires customers who buy gas-powered tools to also buy power-powered tools before a complete ban occurs.

Assume that both prices are $100, and the gas-powered tool is worth $300 over its life. This gas-powered tool generates $200 in surplus value, making it a worthwhile purchase. But suppose this consumer believes that the power tool is worth only $50 to him. Power tools aren't typically purchased, but the mandate makes tools a package deal, and the $350 total is still more than $200.

This transaction increases GDP by $200. But without this mandate, that second $100 would be spent on items that generate at least $100 of value. Compulsory government purchases reduce consumer satisfaction, but GDP is not measured.

There is no obligation (yet) to purchase power tools. However, 30 states require utilities to produce or purchase electricity from renewable sources, typically wind or solar. These policies increase electricity prices. As a result, the household would spend an extra $500 on electricity and miss out on $500 worth of food, clothing, or vacations.

We need to be careful about measuring happiness, as changes in economic activity make statistics less reliable. Government spending, employment, and mandates reduce the relationship between GDP and satisfaction. The economic growth rate for 2023 surprised many economists, but 2.5% probably overestimates the growth rate of prosperity.

Daniel Sutter is the Charles G. Koch Professor of Economics at Troy University's Manuel H. Johnson Center for Political Economy and host of the TrojanVision Conversation. The opinions expressed in this column are those of the author and do not necessarily reflect the views of Troy University.