Blanket Economic Statements
On Wednesday, the United States Bureau of Economic Analysis announced that the Gross Domestic Product decreased in the fourth quarter of 2012 by an annual rate of 0.1 percent. It’s the first contracting quarter since 2009.
Granted, we’re not talking about a large contraction, but the results were particularly jarring, in light of the third quarter’s expansion at a 3.1 percent annual rate. And any contraction is potentially dangerous to the overall economic health of the nation.
Of course, people started assigning blame right away. It started with the BEA, who got a first crack at it by virtue of publishing the report. The BEA noted that most categories of GDP increased, including real personal consumption and real nonresidential fixed investment.
What decreased? The growth in real private inventories was one, taking 1.27 points out of the GDP growth number. That’s pretty big, though it’s seasonally typical as inventories are drawn down for the holiday shopping season. An even bigger contributor was a 15 percent decrease in federal government consumption expenditures, which took 1.33 points out of GDP growth.
Interestingly, all of that shrinkage, and then some, came from cuts in defense spending. Nondefense grew by 1.4 percent, but defense shrank by 22.2 percent. The BEA didn’t explore why defense expenditures dropped by over a fifth.
Economists, looking at the data, followed up with a united recognition that cuts in government spending were directly responsible for the shrinking quarter. Some noted that it was specifically defense spending cuts that were the culprits.
Democrats pointed to Republican intransigence on arriving at a bipartisan solution to the budget. It does appear to be related to the budget issues, and both parties have been pointing at each other. My sense has been that Republicans (particularly in the House) have been unwilling to budge on anything unless the imminent consequences are dire. Regardless, it’s not the mutual Congressional fingerpointing that caught my eye.
Senator Marco Rubio (R-FL) had an interesting spin on it. “We’re beginning to see proof in the last three months of last year the American economy shrunk and it shrunk under this President because of his policies,” he said in a Thursday interview on FOX News.
So let’s see in what way his claim could be true. It’s certainly true that the American economy shrank in the last three months of last year (assuming the BEA’s preliminary numbers hold up, anyway). It’s also certainly true that it shrank under this President, since he was in office last year. But did it shrink because of his policies?
It’s not that the report suggests that the private sector is being harmed by Obama’s policies. The private sector has showed steady growth for over three years in a row, including that last quarter. The seasonal inventory shift accounted for just under half of the drop from the third to the fourth quarter. It was a cut in defense spending that accounted for nearly all of the remaining negative change. Either one alone would have left a small but detectable growth in GDP, albeit a smaller one than in the prior quarter. Together, they led to a very small shrinkage.
Why did defense spending drop in the fourth quarter? It was a combination of several factors, but two in particular stand out. The United States has been drawing down military operations in Iraq and Afghanistan over the past year, reducing the need for military expenditures. At the same time, the uncertainty surrounding the sequestration facet of the Fiscal Cliff meant that the Department of Defense couldn’t count on having its full 2012 complement of spending in 2013. Any responsible organization in that situation seeks to can food and store it in the cellar in preparation for the long winter ahead. It appears that DoD did exactly that, saving money in order to bleed it later to soften the impact of sequestration.
So these two DoD-related factors had the most significant impact on government spending, and thus the drop in GDP, in the fourth quarter of last year. Which of Obama’s policies contributed to those two factors?
In terms of the drawdown, Obama’s policy from his days campaigning in 2007 was to get us out of Iraq and Afghanistan. Rubio believes we should stay in Afghanistan longer. So, yes, in an area of policy difference between the two, Obama contributed to the fourth quarter shrinkage. Is that what Rubio meant?
And Rubio has opposed the sequestration, though only insofar as it applies to defense spending. His stated policies amount to supporting tax cuts, revenue cuts, and cuts in domestic spending, while maintaining or increasing defense spending. To the extent that defense sequestration led to preemptive spending reductions by the DoD, this does put Rubio on record as opposing a policy that led to the fourth quarter drop in GDP.
But was Obama in favor of sequestration? The record isn’t entirely clear. He claimed not to have proposed the sequester, but Bob Woodward’s investigation concluded that he did. Obama did clearly state that he was in favor of having an undesirable alternative in front of Congress as a means of achieving a bipartisan solution to the growing national debt. When he signed the Budget Control Act of 2011, which created the sequester in the first place, he said “We’ve seen in the past few days that Washington has the ability to focus when there is a timer ticking down and when there is a looming disaster.” His point was that the value he saw in sequestration was in it being a forcing function. He didn’t imagine (nor, incidentally, did most Americans) that members of Congress would be able to convince themselves that going over the cliff would be better than arriving at a deal that required compromise on the parts of both parties.
With the clarity of hindsight, it’s easier to see how wrong we were.
None of this should be taken to imply that Obama was in favor of the defense cuts, though. So did Obama’s policies lead to the defense cuts that came from sequestration? At best, they did obliquely insofar as he agreed to the terms, and signed the bill. In other words, not in principle, but somewhat in practice.
Of course, it’s unlikely that many (if any) of FOX News viewers who saw that interview came away with the belief that Rubio was referring to Obama’s oblique support of sequestration, or drawing down military activity in Afghanistan. Whether intentionally implied or not, those who either didn’t have the time or didn’t have the inclination to look into the underlying numbers would infer that it was Obama’s economic policies (exemplified by the ARRA stimulus and ACA healthcare bills) that led to the drop in GDP.
That inference would be very wrong, illustrating the dangers in (Afghan?) blanket economic statements.
Oh, by the way…we’re approaching the fiscal cliff…again…
- Automatic U.S. Budget Cuts Grow Likelier as Stances Harden
- Wonkbook: The real story on the economy’s fourth-quarter drop
- How the GDP’s Big Shrink Might Impact a Budget Deal
- Economy Shrinks…Obama & Pals Blame Republicans
- HOT Did Obama Manipulate Q3 GDP to Create His Election Victory?
- Senior House Republican: “Look Behind 4th Quarter Economic Numbers”
- GDP Drop
- The Error Heard ’Round the World
- Do Tax Cuts Increase Revenue? (Part 2)
- Do Tax Cuts Increase Economic Growth?
- Keynes Enabled?
- Wages, Productivity and Corporate Profits
- Laffer’s Mistake Regarding Stimulus
- Unbalanced Budget Amendment
- What Happened to Employment?
- The (Stupid) Economy
- Relationships Between Spending and GDP