Krystal Ball: The New GDP Numbers — Government IS the Problem

New GDP numbers were released last week. For the first time since the depths of the financial crisis in 2009, the economy actually shrank. And things were just starting to look pretty solid! What the heck happened? You know, I actually think the Gipper may have an answer here.

Yeah. Pretty much. Look deeper at the GDP numbers and it becomes clear that government really is the problem here. Consumer spending was up. Business spending on equipment was way up and housing investment was also way up. Sooo…. What gives?

Well there’s this: federal government spending dropped at an annual rate of 15% or this chart from the Washington Post

Defense spending in particular was dramatically pared back in the last months of 2012. Businesses also depleted their inventories but that’s no big deal since consumer spending was up and they’ll have to restock at some point. The real story here is cuts in federal spending. This is what austerity looks like, my friends. At a time when our recovery is still on shaky legs, cuts in federal spending could easily send us right back into a recessionary tailspin. In fact, if federal spending had just remained even, we would have had over 1% growth. Not amazing but positive territory.

But you might say, this is probably a one-time deal right? After all, we had the whole fiscal cliff situation and they were probably preparing for the sequester cuts that were supposed to take effect in January.

That’s all true but it’s also not the whole story. Take a look at this chart. Since the beginning of 2009, the private sector has been in positive territory, consistently contributing to economic growth. Meanwhile the private sector has mostly been a drag with this final quarter being one of the most dramatic examples.

Krystal BallWhat’s more, we’ve just ended the payroll tax cut so middle-class folks will have less money in their pockets and may very well start spending less. We’ve also still got large sequester cuts on the horizon that could drive public spending down even further, and Republicans still seem to think it might be fun to use a government shutdown or debt ceiling crisis to force further cuts. You guys sure know how to show a girl a good time.

Look, there’s no question that over the long term, we’ve got to balance budgets and pay down our debts. But short term deficit hawkishness is hurting us badly. Our problem is not relief for storm victims or Federal money for family planning services, it’s a tax base that is too low to support rising health care costs and an aging population over the long term. Let’s deal with those problems over the long term. But for now, Congress, how about we just try to avoid shooting ourselves in the foot.  I know blaming government for a lack of spending is not the type of blaming government that the GOP enjoys, but in lean times it’s the only type of blaming government we can afford.  You know, what would really be great is some stimulus but I understand that’s probably too much to ask. For now, let’s just keep the government from reversing the private sector-led recovery that’s already underway.

(Cross-posted from


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