Wednesday, January 30, 2013

US economic growth weak: austerity to the rescue?

Awesome. Faced with continuing weakness in the economy, President and Obama are debating on how much to try to reduce the federal deficit. The deficit that will continue in any case so long as we have a trade deficit and private investment is lower than private income.

Bloomberg Businessweek reports the GDP news in an upbeat tone: Despite a Lousy GDP Report, U.S. Economy is Primed to Expand by Matthew Philips 01/30/2013. The official release from the Commerce Department's Bureau of Economic Analysis (National Income and Product Accounts: Gross Domestic Product, 4th quarter and annual 2012 (advance estimate)) says:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent.

The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency... The "second" estimate for the fourth quarter, based on more complete data, will be released on February 28, 2013.

The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased. [my emphasis]
Philips reports:

The biggest shocker is the 22 percent decline in defense spending. According to Neil Dutta, head U.S. economist at Renaissance Macro Research, there have been only seven quarters since 1947 in which defense spending fell that far. That makes it a 3-in-100 event, he wrote in a note on Wednesday. Again, just like business inventories, this is an example of spending being pulled forward—probably for fear over federal budget sequestration—and thereby stealing from future growth. During the third quarter, defense spending jumped by 13 percent. Back in October, BNP Paribas chief economist Julia Coronado likened that surge to a “use it or lose” mentality within the Pentagon. Looks like they just used it before October: After surging from $807 billion to $834 billion in the third quarter, the annual rate of defense spending crashed to $787 billion in the fourth quarter.

Now the good news. While businesses were cutting back on inventory spending, total business investment surged by 12.5 percent as companies spent on capital goods such as computers and trucks and machinery. That’s very good news, especially for a recently beleaguered manufacturing sector.
Federal spending goes down - defense spending in this case - and it's a drag on the economy. Just like in Britain, Greece, Ireland, Italy, Portugal and Spain, with Germany and France undertaking the same sort of approach. Who would have guessed?

Philips writes of the last several months, "it’s not surprising that growth and spending have been so choppy. Also, this is the kind of growth [i.e., apparently flatlining at the moment] that happens when you shrink government. Total spending by the federal government fell by 15 percent. Given such a dramatic decline, it can be considered heartening that the private sector was able to pick up so much of the slack." (my emphasis)

Dean Baker's reflection on the Clinton deficit-fighting era and the Austerian myth that has grown up around it among Democrats is timely, Deficit Delusions: Putting to Rest the Clinton Legacy FDL 01/29/2013. He notes of the post-Clinton years:

Note that the budget would have shifted from surpluses to deficits in 2002 even if there had been no tax cuts and no increase in military spending associated with the wars in Afghanistan or Iraq. While neither of these may have been good uses of public money, they did not cause the deficit. The downturn following the collapse of the stock bubble led to the deficits in 2002-2005.

The additional deficits caused by wars and tax cuts were actually a positive for the economy in these years. From an economic standpoint there would have been much better uses of this money, but this spending did help to boost the economy at a point where it desperately needed a lift. While the Fed was not quite at the zero bound in terms of its monetary policy, it had lowered the federal funds rate to 1.0 percent by the summer of 2002. [my emphasis]
The Democrats really, really need to get over their deficit fixation. Even though that will give David "Bobo" Brooks a big sad.


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