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 business investment 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.