GDP report: Austerity is stifling the recovery

AP

COMMENTARY According to the advance report on GDP released Friday morning, economic growth for the fourth quarter of 2011 was 2.8 percent, a rate of growth near the average rate of GDP growth in recent decades of roughly 2.5 percent. Average economic growth is enough to keep us from losing ground, but re-absorbing the millions of unemployed workers into productive employment will require an acceleration in GDP growth. We need a growth spurt that exceeds trend by some margin, something we haven't seen yet, and without that we are headed for a very slow recovery.

Unfortunately, when the components of GDP -- consumption, investment, net exports, and government spending -- are examined, it's not clear where that spurt will come from. Households lack the income needed to support a burst in consumption, and they are in no position to support a large rise in debt-fueled consumption. We wouldn't want that in any case.

Investment has two components -- business investment and the construction of new houses.  Businesses are waiting for the outlook to improve before increasing investment (Business investment will follow GDP growth, not lead, and the housing market is unlikely to give us the necessary spark.) Net exports are a possibility. They were featured in President Obama's State of the Union speech as part of the path to a better economy, but problems in Europe make an export boom unlikely anytime soon. Besides, not every country can be a net exporter. Other countries will not sit idle while we try to increase our share of exports to world markets, so that even if the world economy grows robustly gaining, market share will not be easy

GDP growth in Q4: Good, not great

That leaves government spending. However, these numbers are moving in the wrong direction, and that is unlikely to change given the emphasis on reducing the long-run budget problem. In fact, premature austerity -- cutting spending before the economy is ready for it -- is taking a toll on the recovery. The fall in government spending reduced fourth-quarter growth by 0.93 percent; if government spending had remained constant, GDP growth would have been 3.7 percent, rather than 2.8 percent.

This is the opposite of what the government should be doing to support the recovery. We need a temporary increase in government spending to increase demand and employment through, for example, building infrastructure. That would help to get us out of the deep hole we are in. Instead, the government seems to be trying to make it harder to escape.

We do need to address our long-run budget problems once the economy is healthy enough to withstand the tax increases and program cuts that will be required. But the idea of "expansionary" austerity has failed. Austerity in the short-term simply makes it harder for the economy to recover and delays the day when you can finally address budget issues without harming the economy. The lesson is that government needs to support the recovery, not oppose it through a false promise that contraction of one sector in the economy will be expansionary. And given how far we still have to go before the economy is healthy again, it's not too late to put that lesson into practice.

[sirmarion-2009]

If Obama wants all to pay their fair share, start with the 36 in his executive branch who owe back taxes.Stop watsefully spending tax dollars on electric driven cars that require more coal and fuel oil driven palnts to provide energy to charge those stupid batteries.

[dlackey2]

Exactly. We need to invest in our crumbling infrastructure. Making this investment now would alleviate unemployment and stimulate the economy, while providing for future benefits.

The same goes for education; teachers are being decimated in a shortsighted effort to "save" money, while our nation's futurecompetitiveness is being sabotaged.

[sirmarion-2009]

The Stimulis already paid for the Teachers,firemen,and Policemens Unions once,with out creating any new jobs or econcomic growth. Why was not more invested in infrastructure as Obama promised all those shovel ready jobs?

[rayward73446]

Those that disagree with Government spending effecting the econopmy are short sighted, and wrong. During the Great Depression the USA recovered only after the Government started spending more on infrastructure projects and put people back to work. That raised business profits, created more hiring and more jobs. The opinion that cutting Government spending/debt helps the nation recover from a severe and long recession are just hogwash!
Republicans will tout this as the answer when thier only goal is to reduce the size of government, except themselves. It is completely self serving, and a political ploy.

[sirmarion-2009]

If you knew History you would know the 2nd world war is what boosted our economy not Rosevelts big deal.

[sjc_1]

It was called the New Deal and most credible economists agree that it did not work as well as it could have because not enough was done. Guess who stopped FDR from doing enough....you guessed it.

[Osprey4]

Despite a 12.5% drop in defense spending, federal government spending is growing, not shrinking.

Mark Thoma's analytical skills, however, appear to be shrinking.

[sjc_1]

There is a small proposed reduction in spending over the next 5 years, due to the draw down in Iraq. You are going to have to show where you came up with 12.5% which is thin air, because you can not, because it is not true.

[Osprey4]

sjc_1, the 12.5% was widely reported by the news media, including CNBC (where I read it). Just because I didn't provide citations does not mean the numbers are "thin air".

[Jilli_B]

We've seen the effects of austerity in Europe, the results support the case that austerity is not the right move.

[salesmonsters]

Are you serious? Government spending already accounts for 1 in every 4 dollars of spending and 3 of those 4 dollars are borrowed! Would you like to also raise the debt ceiling to 20 trillion while you're at it? How about doing away with the 35% corporate tax and 15% capital gains tax and let investments fuel the recovery, which will also facilitate the recovery of the housing market. All the new jobs and opportunities will allow consumption will follow.

[sjc_1]

1 in 3 dollars is borrowed.

[sjc_1]

Few companies pay 35% and the 15% is part of why we are in debt.