Fear of government spending a roadblock to economic recovery

At the start of 2013, it appears the United States economy is headed for recovery. That is, as long as an exaggerated fear of government spending doesn’t get in the way.

The Bureau of Labor Statistics’ job report released on Feb. 1 cited 157,000 jobs added in January, along with revisions to the end of 2012 that included an additional 127,000 jobs for November and December than previously reported.

Still, despite those positive numbers, gross domestic product in the fourth quarter of 2012 fell at a 0.1 percent rate – the economy shrank for the first time since mid-2009. The dichotomy set up by the jobs report and the GDP numbers reflects a fundamental debate in Washington: the role of government spending during a recession versus fear of an increasing national debt.

The data released from the end of 2012 and the beginning of 2013 is evidence enough that, in an economic environment like the U.S. finds itself in now, slashing government spending in the name of deficit reduction does more harm than good and only postpones economic recovery.

A more in-depth look at the numbers reveals that it was indeed a reduction in government spending that led to the GDP decline – most of the other components had a positive growth rate. Personal consumption, for example, increased at a 2.2 percent rate. But it was the significant decrease in government spending that sunk the economy in the final quarter of 2012 – most notably the 22.2 percent rate decrease in federal defense spending.

According to the Bureau of Economic Analysis, the decrease in government spending caused a decrease of 1.33 percentage points in the GDP growth rate. Basic math tells us, then, that had government spending not seen such a dramatic decrease, the GDP would have had a positive growth rate.

The deep cuts in government spending stemmed from the sequester and fiscal cliff deals that marred political discussion at the end of 2012. These new economic numbers show just how damaging these cuts were and fly in the face of anyone touting deficit reduction as the first and foremost step to economic recovery.

The ardent commitment that many in congress have to severely reducing deficit spending is stalling the recovery. Not only do demands for spanning cuts to government spending result in damaging political gridlock, they run contrary to an improving economy.

Until private consumption returns to prerecession levels, government spending needs to make up the difference in order to keep GDP growth positive. While the private sector continues to add jobs at a promising rate, the public sector has seen 24,000 jobs lost since November. How is the unemployment rate supposed to decline when thousands of government workers lose their jobs each month?

Yes, trillion dollar annual deficits that accumulate to a more than $16 trillion national debt are troubling, but they are not the most pressing economic issue the U.S. government needs to address. That would be ensuring economic recovery – in particular GDP growth and a declining unemployment rate. That is what the government needs to worry about right now. Fretting over high deficits when in reality the U.S. can continue to borrow for next to nothing is only slowing growth.

Deficit and debt reduction is a long-term problem that should be addressed slowly in the long term, not in a panicked slash-and-burn approach that amounts to little more than the U.S. government shooting itself in the foot.