Decline in defense spending drags down GDP but experts say it's only the beginning

AL.com ^ | 5 Feb 13 | Leada Gore

[SkyPilot]

The drag to Gross Domestic Product caused by cuts in defense spending in the fourth quarter of 2012 could be just the beginning of a long, painful process, according to economic experts.

GDP fell by 0.1 percent in the fourth quarter, the first such negative growth since 2009 and an economic wet blanket after a 3.1 percent increase in the previous quarter. A 22 percent drop in government defense spending was blamed for much of the decline.

The fourth-quarter drop came as those in the Pentagon waited to see if Congress would reach a deal to avoid sequestration by the original Jan. 1 deadline. It didn't, opting to delay the deadline to March 1, something DOD officials said added even more uncertainty to spending and budgeting process.

If the economic impact felt from the threat of sequestration was severe, the full-blown cuts could be devastating to any fledgling economic recovery, experts say. Sequestration would cut some $500 billion from defense spending in the next decade, with an equal amount coming from other sources such as health and education initiatives.

According to the Economic Policy Institute, a Washington, D.C.-based think tank, the across-the-board cuts to defense spending that will come if sequestration is triggered March 1 will continue for several years. They estimate defense spending alone would hit GDP a negative 0.3 percent in 2013 and negative 0.4 percent for each of the next two years.

Non-defense spending hit by sequestration – many federal agencies would see cuts up to 10 percent, too – would drag GDP down an equal amount, making 2013's total projected impact some negative 0.6 percent followed by negative 0.8 percent in 2014 and 2015.

Congressman Mo Brooks, R-Huntsville, said the problem originates from the White House.

[SkyPilot]

Not only will Sequestration hollow out our military and break faith with our men and women in uniform, it is bad economics.

His advice to stop the slide? "Congress needs to show some courage and brains and cancel sequestration. The growing acquiescence to sequestration needs to end," he said. If sequestration does go into effect, GDP won't be the only thing in decline. The Economic Policy Institute analysis shows sequestration would result in a job loss of some 689,000 in 2013, with the losses split almost equally between defense and non-defense sectors. More job losses would come the next two years – 933,000 in 2014 and 959,000 in 2015. Others predict those numbers could be much higher, with small businesses taking the brunt of the hit.

Our GOP masters have lost their minds if they think all of this is a political winner.

If they allow Sequestration to happen, I predict they will lose the House of Representatives in 2014 by a wide margin.

[gorush]

[GeronL]

government spending should never be counted as part of the GDP, especially when it is all DEBT

[palmer]

I realize we need other cuts to with these, but keeping high defense spending is not “good economics”. At best it is neutral since it doesn’t deplete resources the way stimulus does. The “painful” cuts will have to come sooner or later and it will take guts. It is easy to keep punting.

[E. Pluribus Unum]

If they allow Sequestration to happen, I predict they will lose the House of Representatives in 2014 by a wide margin.

I totally agree, dude.

They should stay away from spending cuts of any kind.

Let the Democrats take the hit for all the spending cuts they have in mind.

I forget... other than gutting defense and opening the southern border wide, what spending cuts do they have in mind?

[hinckley buzzard]

Think about what this says: it says, the only thing keeping the economy out of recession is ever-expanding government borrowing and spending. In other words, a credit bubble. As we have seen repeatedly the last ten to fifteen years, there is no cure for a bubble other than a bust. And better busted sooner than later.

[kabar]

Are you suggesting that we can't cut spending? Not even $100 billion a year from a $3.7 trillion annual budget?

I agree that we don't have to cut DOD by $50 billion a year, but the cuts could come from elsewhere. The House has already passed a bill that cuts the $100 billion in a much wiser fashion. The Dems have yet to come up with an alternative.

We have yet to make any real spending cuts and continue to run trillion dollar annual deficits. Yes, it is going to be painful, but cancelling sequestration in not the way towards fiscal discipline.

[BfloGuy]

Not only will Sequestration hollow out our military and break faith with our men and women in uniform, it is bad economics.

It is not bad economics. Your are very wrongly-informed.

GDP is nothing but a measure of spending. So, if the government spends more, GDP increases.

It's economic nonsense that more spending equals economic growth. The government can spend till hell won't have it and economic growth will not occur.

Economics in the U.S. has been distorted beyond recognition to the point that supposed conservatives are now upset that the government will be spending less.

You may very well argue against the cuts [which are not cuts at all, merely a reduction in the growth of spending], but, please, do not complain about negative economic repercussions.

When the government takes our money and spends it, it goes down an economic hole. That some of it is spent on the military does not change that.

[Jacquerie]

Agree. Government spending, which means spreading around not only taxes collected and money borrowed, but also funny money created out of thin air, should not be included in GDP.

Government spending adds nothing to our national wealth.

[ClearCase_guy]

I completely agree.

Sadly, the cuts in Defense spending will be done stupidly, and some good people will be lost, and some good systems will be harmed. It doesn't have to be that way. There is tremendous waste and abuse in DOD acquisitions, to say nothing of other parts of the department. There is so much that could be cut, and done properly the cuts would probably do more good than harm.

But I expect the pain to immense -- because the bureaucrats want to send a message: "don't cut my budget".

[Hoodat]

Defense spending has increased over last year. Where do these people get this idea that defense spending has been cut?

[USFRIENDINVICTORIA]

Well said!

[Hoodat]

Federal spending increased in 4th Quarter

[Alberta's Child]

Exactly.

[1010RD]

The drag to Gross Domestic Product caused by cuts in defense spending

Really, that's the proven cause? I doubt it. Obama's placed plenty of speed bumps on the economy. The military needs cutting. There's plenty of waste throughout government. A smaller government, including the military can be just as effective.