GDP Contraction: Did Government Spending Cause It?


The recent National Income and Product Accounts report indicates a surprising 0.1% gross domestic product (GDP), the "broadest measure of the nation's economic growth," contraction in the fourth quarter of 2012, the first such contraction since the Great Recession.

The news elicited immediate criticism and a defensive shift from the GOP and the White House, respectively, reminiscent of the bitter partisanship that characterized much of President Obama's first term. The White House accused House Republicans of dangerous brinkmanship that threatens to undermine the nation's gradual economic recovery; not to be outdone, Republicans excoriated the White House for its blame game. 

But most economists agree that it is largely premature to distribute fault or speculate on a double-dip recession, especially given other positive indicators, including a resurgent housing market, a 2.2% increase in consumer spending, an incredibly strong stock market, and modest job growth. Capital Economics Chief Economist Paul Ashworth dubbed it "The best-looking contraction in GDP you'll ever see," noting "the rest of the report is encouraging." With all these propitious developments, what exactly caused the slight contraction?

Contrarians on the right may quickly cite allegedly high taxation, the deficit, or basically any Obama policy real or imagined as the underlying problems. But the first and most obvious culprit is spending cuts. According to a recent New York Times article, "The federal government helped bring the economic recovery to a virtual halt late last year as cuts in military spending and other factors overwhelmed the Federal Reserve’s expanded campaign to stimulate growth."

Indeed, government expenditures (federal, state, and local) are on downward trajectories, the inevitable consequence of budget battle outcomes tilted overwhelmingly towards spending cuts and concluding two costly wars.

The dangers spending cuts pose to a recovering economy — especially one that suffered from an abnormal recession — are abundantly clear. With budget and sequestration talks coming in just a few months, Washington has yet another chance to muck up the recovery.

For GOP intransigence certainly is a factor in the equation, as elucidated by my PolicyMic colleague Tom McKay, as Republicans have been the ones forcing the spending cuts all along. In summer 2011 GOP obstinance during the debt ceiling debate, which should not have been a debate in the first place, almost incurred economic calamity and resulted in an unprecedented U.S. credit downgrade. If House Republicans, namely the extremist Tea Party wing, are unmovable during sequestration talks later this year, a meaningful resolution will almost certainly be impossible and sequestration will take effect, thereby devastating the economy. The 0.1% contraction will be a mere hiccup in comparison.

The New Republic said it best in 2010: slashing spending "will delay the recovery and hamper or altogether impede the transition to new industries." If jobs and economic growth are truly significant goals, then undisciplined, radical cutting is the wrong way to realize them.