Economics, Pethokoukis

No, the negative fourth-quarter GDP report doesn’t prove ‘austerity’ is killing the US economy

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US economic output fell at a 0.1% annualized rate in the fourth quarter, adjusted for inflation. Blame spending cuts, say the Democrats. Blame Republican “austerity.” And one more thing: Stop the sequester. As the Center for American Progress put it: “The economy most certainly would have grown at a faster rate were it not for the ongoing political brinksmanship over the debt ceiling and the risk of sharp fiscal contraction in the form of the pending automatic ‘sequestration’ budget cuts.”

If you break down the GDP report, you begin to see the problem with this line of argument. Private-sector GDP actually added 1.2 percentage points to overall GDP during the past three months. A decent rise in consumer spending was slightly offset by a drop in gross private domestic investment (thought equipment and software spending was up) and a rise in imports. Government spending, however, subtracted 1.3 percentage points, turning the overall GDP number slightly negative.

But so what? Liberals are confusing a metric used to measure the size of the US economy with the actual US economy. What if GDP internals were reversed? What if government spending contributed 1.2 percentage points, and the private sector subtracted 1.3 percentage points? The overall GDP report would have been superficially the same, but in reality much, much worse with the real economy contracting.

Or what if government spending added 6 percentage points, and the private sector subtracted 2 percentage points? The news headline would say GDP rose by 4%, but that growth would be illusory and unsustainable. Should we have more government spending just to prop up the GDP numbers? As economist Tyler Cowen notes in The Great Stagnation: “We are still valuing government expenditures at cost rather than being able to measure prices set in a competitive market. … The larger the role of government, the more the published figures for GDP growth are overstating the improvements in our standard of living.”

Instead of kvetching about how spending cuts are hurting growth, liberals should focus on the fourth-quarter drop in business investment — and the impact this year of the 60% rise in investment taxes. From 1994 through 1999, GDP growth averaged 4% a year. But government spending added, on average, just 0.3 percentage points to that total. The other 3.7 percentage points came from private sector growth, with business investment adding a healthy 1.3 percentage points to that total. (Also note that federal spending as a  share of GDP fell from 21% of GDP in 1994 to 18.5% in 1999. Still the economy boomed.)

Of course, liberals might argue that the drop in government spending is hurting the private sector. But that’s just the reverse of the theory that held the $800 stimulus would ignite the private sector into a multi-year, mini-boom of 4%-plus growth. In August of 2009, the White House predicted GDP would rise 4.3% in 2011, followed by 4.3% growth in 2012 and 2013, too. In its 2010 forecast, the White House said it was looking for 3.5% GDP growth in 2012, followed by 4.4% in 2013. In its 2011 forecast, the White House predicted 3.1% growth in 2011, 4.0% in 2012 and 4.5% in 2013.

But the fiscal multiplier didn’t multiply as predicted. The problem isn’t too little government spending, but too much government regulation and taxation.

39 thoughts on “No, the negative fourth-quarter GDP report doesn’t prove ‘austerity’ is killing the US economy

  1. If you pay a lot of people to dig holes and fill them back up, I believe GDP has technically increased, but you have not added any value. Government spending tends to have a lot of hole-digging.

      • There is no reason why dams or bridges cannot be privately financed if there is a demand to fix them by those that find them useful. Why does it have to be the government that decides where resources are to be allocated? Keep in mind that government is driven by political goals, not efficiency or effectiveness.

        • And who do suppose is gaming the system, as in defense contractors parceling out work so as to optimize congressional support? The daily water main breaks in inner cities go unnoticed because the “takers” who live there lack the clout of Lockheed Martin.

          • Well, from a productive model, Lockheed Martin keeps us from being invaded, protects our national assets, etc. They create assets that last decades for that purpose. They generate value on a national baisis. Inner city water break? The takers don’t get water? Harsh I know, but if you want to go to makers and takers talk, you are still off track. Insuring the takeers have a nice quality of life is emotionally satisfying, but not much else.

            Infrastructure investments are not all created equal. Some spure economic growth, some are a waste of time, some even actively retard the economy by adding debt without value.

      • “And sometimes govt spends to rebuild bridges and replace dams”

        Key word is “sometimes” – what portion of govt spending do you suppose goes to bridges and dams (at the federal level, particularly)?

        A quick look at OMB historical budget tables indicates about 2.5% of total federal spending for the entire Transportation segment of the budget. (Of which, probably a large portion was studies, evaluations, etc, rather than actual physical infrastructure.)

        We could argue over the size and usefulness of the federal transportation budget – but that is not where our spending problem lies.

    • Thanks for making my point Niall. NOLA got plenty of federal dollars for water control preKatrina but spent them on shipping infrastructure and other commercial priorities rather than a levee system that was known to be suspect. (A Times Picayune series described exactly what Katrina did years before it happened.) http://www.outsidethebeltway.com/katrina_federal_money_for_louisiana_went_to_pork_not_levees/

      Post Katrina the Corps got the upgrade “contract” because there is no toll or fee system that makes flood control a viable commercial venture. And the US did not/could not abandon NOLA.

  2. Stop the sequester. As the Center for American Progress put it: “The economy most certainly would have grown at a faster rate were it not for the ongoing political brinksmanship over the debt ceiling and the risk of sharp fiscal contraction in the form of the pending automatic “sequestration” budget cuts.”

    You have to be joking. When are you guys ever going to figure out that you actually need a smaller government and less spending? Is the GOP going to vote to increase the size of government again as it did when Bush was running things?

    • Is the GOP going to vote to increase the size of government again as it did when Bush was running things?
      **************************

      Maybe you missed it, it’s been growing (gov) since 2007 when the dem’s took both houses and kept growing until Rep took back the House in 2010.

        • Republicans seem to have blind spots about big government. When you look at the data you find that even their greatest heroes (Reagan comes to mind) expanded government.

      • Maybe you missed it, it’s been growing (gov) since 2007 when the dem’s took both houses and kept growing until Rep took back the House in 2010.

        So? The GOP grew the size of government when it had control of both the Senate and the House and Bush was in charge. There is no evidence at all that the GOP is any better on the issue of big government than the Democrats are.

  3. I think the question some Democrats have been asking is, were Keynesians were right all along, in that slashing spending AND raising taxes (combined with health, social service and education cuts, and rising food prices) on ordinary workers is destructive in a depressed economy? And should we actually be doing the opposite?

    If Congress really wants austerity, I do have some suggestions as to how we can cut some spending. Cut the egregious corporate welfare (major corporations are making record profits – why do they need welfare?); have the Pentagon return to 2007 budget levels; cut Congressional staff budgets; stop the insane perks given to those in the military four star club. (Should Mrs. Four Star really rate a cook?)

    I think consumers and tax-payers will be happy when Congress, which claims to want to cut spending and that it’s “good” for the country, takes the lead.

    • Lord Keynes suggested that government deficit spending might be appropriate during recessionary times and that government surpluses would be appropriate during expansions. The problem is that our government has adopted only half that strategy. It’s like WC Fields used to say — Sometimes I drink to drown my sorrows. Sometimes I drink to celebrate my happiness.

    • Business is clearly happy that the lunatic fringe in the House listened to reason on the cliff and the debt ceiling, or so says that key leading indicator, the DJIA. (up 6 percent this month.) Is it possible that business investment decision makers care more about certainty than than a rebound in investment tax rates?

    • “Cut the egregious corporate welfare (major corporations are making record profits – why do they need welfare?)”

      You understand that those “record corporate profits” are a direct result of interest rate manipulation at the Fed/Treasury? Without the reckless ZIRP policy the Dow is nowhere near 14k. Thank Obama, asshat.

  4. While Defense spending may have slowed during the quarter, perhaps we need to look beyond and see just what was spent in total.

    Federal outlays by quarter:
    1st: 966,188
    2nd: 884,957
    3rd: 809,969
    4th: 907,912

    From todays report I find this grim reminder:

    During 2012 (that is, measured from the fourth quarter of 2011 to the fourth quarter of 2012) real
    GDP increased 1.5 percent. Real GDP increased 2.0 percent during 2011. The price index for gross
    domestic purchases increased 1.5 percent during 2012, compared with an increase of 2.5 percent during
    2011.

  5. The economy was being buoyed up by Government spending to promote the re-election of President Obama. Once Obama achieved his second term, spending went down and the the artificial levels of economic activity ended.

    Just one more example of the Democrat Party using tax payer money from the Treasury to buy votes.

    • Pure right wing fantasy Stormy223. We did not need to buy votes to beat the low class candidates the Republicans chose. But then that was all they had.

      • “We did not need to buy votes to beat the low class candidates the Republicans chose. But then that was all they had.”

        That would be private equity extraordinaire Romney and whiz kid smart Paul Ryan. The public chose community organizer parasite Obama and his half-wit sidekick Biden.
        You won over a corrupt, dumbed down public. Congratulations.

  6. I don’t care that GDP shrunk because of a cut in defense spending. In fact, I’m happy about it. As people quibble over the 0.1% of GDP, they miss the bigger picture. We are not diverting resources from productive stuff to non-productive stuff.

    The perfect example is 1944 vs. 1950. The 1944 economy ($2.03 trillion) was technically larger than the 1950 economy ($2.00 trillion). The 1944 economic activity was boosted by huge government outlays for military spending for WW2. Even though the economy was slightly smaller in 1950, the standard of living was much higher. Even if you had money in 1944, it was difficult to buy gas, sugar, nylon, cars, houses and many other items. In 1950, these were available in abundance. The 1950 economy was much better because people were buying things that made their life better like houses, cars, appliances, etc. In 1944, they were buying ammo, bombs, tanks, etc. Same thing applies in 2012. I would rather spend money on iphones, computers, vacations, cars, houses, etc than on blowing stuff up.

    • You need to define prodcutive and non-productive better. Is a security guard at a bank productive? Yes – he protects the assets from theft. Is the defense department prodcutive? Yes, they keep the assets safe and over ensure order, both domestic and abroad.

      • Is a security guard at a bank productive? No. He does not increase assets or wealth. I live in a small town and we do not have a security guard at the bank. Would we be better off with a security guard? No. It would be extra cost that would either a) reduce bank profits, b) reduce interest on deposits, or c) increase interest on loans.

        Is the defense department productive? To the exent that it protects freedom – yes. The best I can tell, our freedoms are no less protected this quarter compared to last quarter.

        • And of course we could not possibly defend ourselves without $1 Billion Per aircraft could we? Or more $ than ALL our enemies and allies combined by a multiple. Oh no. It isn’t at all about pork for the DOD and its friends.
          Or bases for politicians to defend when even the DOD doesn’t want them. What a crock.

        • The trouble is that most of what the defense department does is related to offense. You certainly don’t need to spend more than the next 40 countries combined on defense. But if you want to create an empire or be a global cop, which is not defense, you do need to have your taxpayers pay up.

    • “We are not diverting resources from productive stuff to non-productive stuff.”

      We are still diverting an enormous amount of resources from productive stuff to non-productive government stuff.

      • I agree. My comment was specific to the spending that had been eliminated. There is still a huge amount of “GDP contraction” that I would like to see.

  7. “By CBO’s estimate, federal outlays—totaling $909 billion—would have been about the same in the first quarter of 2013 as they were during that period in 2012, if not for shifts that occurred in the timing of certain payments because the scheduled payment dates fell on a weekend or holiday. (The year-over-year changes discussed below reflect adjustments to account for those shifts.)

    For some major programs and activities, spending increased:

    Social Security, Medicare, and Medicaid—Expenditures for each of the three largest entitlement programs were greater than in the same period last year. Outlays for Social Security benefits increased the most—by $12 billion (or 7 percent). Spending for Medicare rose by $6 billion (or 5 percent) and outlays for Medicaid rose by $5 billion (or 8 percent).
    Net interest—Outlays for net interest on the public debt were $5 billion (or 7 percent) greater, reflecting both the growing debt held by the public and larger payments for inflation-indexed securities.
    Fannie Mae and Freddie Mac—Net payments to the government-sponsored enterprises were $14 billion less than those made at the same time last year.

    In contrast, outlays decreased for some major categories of spending:

    Unemployment benefits—Spending declined by $6 billion (or 23 percent), mostly because fewer people have been receiving benefits in recent months.
    Defense—Outlays were $9 billion (or 5 percent) less than in the same period last year.”

    http://www.cbo.gov/publication/43837

  8. ” In its 2011 forecast, the White House predicted 3.1% growth in 2011, 4.0% in 2012 and 4.5% in 2013.But the fiscal multiplier didn’t multiply as predicted. ”

    The imminent sequester of 2013 was not included in the 2011 forecast, but it has been included in this 4th Quarter, with, among other things, military spending suffering its steepest drop in 40 years.

    You’ve proven nothing here but your own intellectual dishonesty.

    “The problem isn’t too little government spending, but too much government regulation and taxation.”
    Ask yourself: does there exist a situation which would falsify my claim? If no, then your claim doesn’t belong to science or knowledge, it belongs to religion.

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