Government Expenditures Help Mitigate GDP's Decline

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by: Carneades

The Commerce Department's Bureau of Economic Analysis released its advanced estimate of gross domestic product (GDP) figures this morning which indicated that the economy contracted less than expected in the second quarter of 2009. The 1% annualized second quarter decline will likely be celebrated, as it is a departure from the ~6% annualized declines the economy experienced in both the fourth quarter of 2008, and the first quarter of the current year. The story behind the numbers is however, no cause for celebration.

The true health of the economy - broadly defined for the purposes of this article as the ability of the private sector to maintain capital expenditures, create jobs, and service its debt related obligations - has seen virtually no improvement, and in fact has continued to deteriorate throughout the current quarter. What is evident though, is that Government expenditures - a dollar amount that contributes to GDP in the same manner as private investment - have been propping up our largely wilted economy. From the Commerce Department's press release:

Real federal government consumption expenditures and gross investment increased 10.9 percent in the second quarter, in contrast to a decrease of 4.3 percent in the first. National defense increased 13.3 percent, in contrast to a decrease of 5.1 percent.

The percentage increases reported above should not come as a surprise, as we all know that the federal government has ramped up its spending efforts. Those of a Keynesian persuasion would even argue that the government’s role in GDP is warranted – and even necessary – during a recession. This may or may not be correct, however, we would argue that such spending is currently serving no purpose other than creating the illusion of a recovery. The American economy became the most dynamic and resilient in the world because of the innovations derived from entrepreneurial pursuits. As government spending consumes a greater share of our nation’s economic output, it is that dynamism which suffers. Uncle Sam’s checkbook may be able to mitigate the headline declines in GDP growth; it can not however bring prosperity back.

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