Economy Declined as Government Spending Rose
By James D. Agresti
February 4, 2013
In the wake of stunning news that the U.S. economy shrunk by 0.1% in the last quarter of 2012, prominent media outlets and commentators are reporting that lower government spending is the cause of the economic decline. In reality, however, government spending rose by 0.8%, and the claim that it fell stems from a federal report that defines “government spending” so narrowly that it excludes 47% of all government spending.
On January 30th, the U.S. Bureau of Economic Analysis (BEA) issued a preliminary report stating that gross domestic product (GDP) decreased by 0.1% in the fourth quarter of 2012. The report emphasized that this is an “advance estimate … based on source data that are incomplete or subject to further revision….” The report also stated that the decrease in GDP “reflected negative contributions from private inventory investment, federal government spending, and exports….”
Seizing upon the “federal government spending” aspect of this report, some journalists, commentators and organizations have claimed that reduced government spending is dragging down the economy. This was the focal point of a combative exchange on CNBC between on-air editor Rick Santelli and senior economics reporter Steve Liesman. Attributing the decline in GDP to left-leaning government policies, Santelli stated, “When you act like Europe, you get growth rates like Europe, and our discussions with economists sounds like we’re in Europe!” To which Liesman shot back, “We reduced government spending by 15 percent! That’s not Europe!”
In fact, government spending rose by 0.8%, and the decline that Liesman and others are citing only applies to a narrow segment of spending that excludes most social program benefits. This is shown in BEA’s report on GDP, which reveals that the “government spending” in this report consists of “government consumption expenditures and gross investment.” This is merely a subset of government spending that excludes 69% of all federal spending and 20% of all state and local spending. As BEA explains in its “Primer on Government Accounts” and its webpage on measures of government spending“:
• “Consumption expenditures include what government spends on its work force and for goods and services, such as fuel for military jets and rent for government buildings and other structures.”
• “Gross investment includes what government spends on structures, equipment, and software, such as new highways, schools, and computers.”
• “Government consumption expenditures and gross investment … is a measure of government spending on goods and services that are included in GDP.”
• “Total spending by government is much larger than the spending included in GDP.”
In sum, what BEA categorizes as “government spending” in its GDP reports doesn’t include items such as unemployment benefits, food stamps, welfare payments, subsidized housing, Medicaid benefits, Social Security benefits, Medicare benefits, foreign aid, and interest on the national debt. This amounts to 47% of all federal, state and local government spending, largely consisting of social programs that advocates for more government spending say will spur economic growth.
The BEA report in question estimates that “government spending” declined by 15% in the fourth quarter of 2012, consisting of a 22% decline in national defense, a 1% increase in other federal spending, and 1% decrease in state and local spending. Again, these figures are preliminary, they only apply to selected categories of government spending, and real total government expenditures actually increased by 1%.
Hence, if one were to draw a simplistic conclusion from this data (as reporters and analysts have done), an accurate assessment would be that increased overall government spending—with more spending on social programs and less on national defense—accompanied the decline in GDP.
It is important to note that the above-cited figures are comparisons between the third and fourth quarters of 2012, and quarterly figures on government spending tend to fluctuate. Thus, when journalists and commentators focus on short-term data as they have done in this case, they obscure the larger picture of what has taken place in the past several years and over the longer term. Consider the following.
As shown in the graph below, total government spending rose dramatically in 2008 and 2009 and has since consumed more of the nation’s economy than at any time since 1960, which is as far back as this BEA data goes. BEA also tracks a slightly less inclusive measure of government spending (called current expenditures) that dates back to 1929. By this measure, government spending consumed more of the nation’s economy during 2009-2011 than ever recorded in the history of the nation, including the peak of World War II. And in 2012, current spending was just a hair below the peak of World War II.
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This country needs real leadership now. It seems we are on the verge of collapsing. Somebody do something!
So the economy is supposed to immediately rise as soon as the government starts spending? In any financial system, whether it be a business or government, where spending is made to produce stimuli that will generate economic growth and income there is always going to be a time lag between the spending and the desired growth.
That lag period will vary from weeks to many months or even longer, depending on many variables.
Let’s be clear that I am not claiming the increase in government spending in this quarter caused the decline. I am showing that total government spending did not decline, despite what is being reported.
I agree there can be a time lag between cause and effect (which is why I used the phrase “simplistic conclusion” and why I wrote that it is “important to note” that these figures are merely “comparisons between the third and fourth quarters of 2012.”) However, your comment presupposes that government spending can only provide stimulative effects on the economy, when in fact, the effects can also be negative.
For example, social programs can reduce peoples’ incentives to work and save, thus depriving the economy of their labor and investment. Even Lawrence Summers, Obama’s former chief economist and Clinton’s Treasury Secretary, affirmed that government assistance programs provide “an incentive, and the means, not to work.”
One can also argue that these programs have positive effects on GDP, but simplistic conclusions like those drawn by the media in this case are far from adequate to prove whether positive or negative effects dominate. Furthermore, their arguments are based upon an abjectly false assertion that government spending fell.
Your answer seems to be a good one. Long term high government expenditures in Europe doesn’t seem to have done much for economic growth or high employment. Of course Europe has low birth rates (ours are declining also) and part of their problems could very well be related to that. Sorting it out is probably not completely doable.
Recent news reports indicated that there was a revision to the original December quarter figures whereby the revised figures showed that there was in fact a small growth in the economy. Has Just Facts investigated this?
I don’t know if the staff reads old comments, but I’ll note that actually if you look at data from the US and around the world for the last few decades, most of the time the faster government spending grows, the slower the private economy grows (and vice versa). Details here, easy to see, though the page doesn’t attempt to establish the more difficult issue of cause and effect:
In addition regarding how much the federal government spends, the total expenditures figures from BEA using the international standards (SNA vs. the US NIPA standard) seem to include the most. However even they leave off many expenses where as BEA docs explain where instead of always recording expenditures and revenue separately, in certain cases they offset expenditures by receipts to hide spending. The federal budget does this, which the GAO has complained about for decades since it hides 15-20% of federal spending. There is 1 place in the yearly federal budget indicating “gross outlays” which include all spending, almost every other place you see a budget figure it will be “net outlays” which leave off that hidden spending. There doesn’t seem to be a table anywhere that collects the historical gross outlay figures. This page provides links to sources for all of this: