Government Watch: Spender of Last Resort

Let’s face it. It’s not a claim or a forecast–it’s reality: our government is the only one buying things these days. Yesterday’s GDP report estimates that our economy shrunk at an annual rate of 6.2% last quarter–far worse than the prior estimate of a 3.8% decline. And it breaks down this way:

• Personal Consumption fell 4.3%, contributing 3.01 percentage points to the 6.2% overall decline (nearly half).
• Private Investment fell 20.8%, contributing 3.11 percentage points to the overall decline (there’s the other half).
• EXports fell 23.6% (contributing 3.44 percentage points), and IMports fell 16.0% (offsetting by 2.99 percentage points), so that net exports (X-M) contributed 0.46 percentage points to the overall decline.
• Government purchases of goods and services rose by 1.6%, with federal purchases rising 6.7% and state and local purchases falling by 1.4%. Government was the only positive contributor to GDP last quarter, on net adding (just) 0.32 percentage points to the GDP growth rate. (Federal was +0.50; state and local was -0.18.)

The GDP data highlight the fact that despite federal government purchases rising at a 6.7% rate last quarter, it hardly made a difference. It only offset the massive 6.76% drop in the rest of GDP by a half of one percentage point. Why? Because federal government purchases of goods and services last quarter were just 7.8% of our total economic activity (GDP)–at an annual rate, just over $1 trillion out of a $14 trillion economy.

So people are complaining and will continue to complain about the federal government extending its reach and getting bigger and taking over the economy–but I ask: what choice do we have right now? The federal government is the only one able to demand and purchase the goods and services our country is already able to immediately produce–the only one with the resources to put that idle capacity to work.

So while the Republicans may not like this trend and the overall direction the Obama Administration will take our economy in terms of an expanding role of government, I fully expect that their complaining about the higher taxes required to fund the (inevitably) higher spending will only lead to bigger budget deficits and more fiscal irresponsibility–not to a smaller government than would otherwise be the case if they just kept quiet about it. And as Bruce Bartlett puts it yesterday, when Republicans complain about higher taxes, it’s really just “crying wolf”:

Yesterday, President Obama issued his first detailed budget. Among its most controversial proposals is a significant increase in taxes, especially on those with upper incomes. Obama also proposes a cap-and-trade system to reduce pollution that is in essence a broad-based energy tax.

Republicans will undoubtedly make extravagant claims about the detrimental economic effect of these higher taxes. When one hears these claims, however, it is worth remembering that they said the same things in years past and none of their dire predictions came to pass.

So these same-old Republican complaints about how higher taxes will “kill” the economy are especially obstructionist and counterproductive today given our clear reliance on the federal government as the “spender of last resort.”

Comments

[Dave Wrixon:]

GDP should be replaced by a measure that does not include Government spending. Governments do not create wealth. At best they redistribute it. Government spending should not be included in any index that is intended to measure the health and dynamics of the economy.

We need to get away from all this GDP nonsense. The real measure of progress is the level of fixed investment. It is the total dearth of fixed investment that has brought the US to its knees. This is why they are printing money rather than making money. If the investment in production is there, generally everything else will gradually fall into place. The trade balance will correct itself, consumers will have jobs and government has a growing tax base to squander.

How are you going to get that investment? Well, labor costs need to go down relative to the global market. The only way that can happen is for the dollar to drop significantly, without being fully compensated by increases in wages. Inflation will result in forgiveness of debt which speeds the necessary de-leveraging, but most people will be a lot poorer than before. This unfortunately, is the price of economic failure, but it is also the only route to economic renaissance.

Mar 01 03:07 AM

[Tyronne Her...:]

dear miss Rogers,
I is just wanting to thanks you again for the fine job you is doing expresing yourself on the behalf of us black folks. You is so right about all them paying more and more taxes. theys got the money to do it with and should give it back to our govement so the govement can give it back to us folks that has been opresed for so long. It sure is nice to see some white folks know our Mr. president elect barack Obama is going to fix it all for myself and my people. Keep up the fine job. i will keep reading and trying to understand what you is saying but if I dont i sure is sure them white folks will. we needs you to fight for us like our mr. president elect Obama is doing.
Thanks you again a lot.

Mar 01 05:56 PM

[John Lounsbury:]

Diane - - -

Thanks for posting articles in spite of the comments that occur from time to time that might lead you to think your thoughts are not appreciated. They are. And you know that when there are issues for discussion, some will deal with them in an intelligent manner, as Dave Wixon has.

Dave Wixon - - -

I have been working for several weeks on an article about the GDP historical record. I find the issue you raise very critical to how past GDP statistics should be interpretted. In correspondence with others for whom I have a high regard, the same question has come up. None of these sources has a good answer, but there are a number of views similar to yours. Thanks for putting your thoughts out for discussion.

Mar 01 07:00 PM

[John Lounsbury:]

Dave Wrixon - - - My apologies for misspelling your name.

Mar 01 07:01 PM

[Glen L.:]

Dave Wrixon is on the money re GDP and government spending. Ms. Rogers apparently does not understand that government spending almost always misallocates scarce resources by reducing the pool of capital available to the entrepreneurs who alone can pull the American economy out of the quicksand. That pool of capital must be refilled via Americans saving their money, not having it ripped off and squandered on politically-driven pork projects, green energy boondoogles, and so on. Even when the money is semi-intelligently spent, it must be passed through the greedy hands of the parasitic bureaucracy, which metastitizes as a result.

The other problem, of course, is where the government gets the money when the taxpayers can't or won't supply it. It borrows or prints it, of course. Default and/or massive inflation are just around the corner. Beware what you wish for.

Mar 01 11:30 PM