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The Spectacle Blog
In the last quater of 2012, real U.S. Gross Domestic Product (GDP) fell by 0.1 percent, after a third quarter increase of 3.1 percent. The decrease is attributable to a few factors: a drop in private inventory investment, a decline in government spending (in particular military spending), and a drop in exports. This was partially offset by increased consumer spending, nonresidential fixed investment, and a decrease in imports.
Is the fourth quarter drop in GDP an indictment of “austerity,” implying that more government spending is needed to boost GDP? As economist Garrett Jones writes at EconLog, it’s important to recognize that GDP is an accounting identity with some measurement peculiarities. Consider his example:
Scenario 1: ExxonMobil hires an unemployed petroleum engineer for $100K per year. After a year, the engineer finds no oil.
GDP does not change. No oil is found. No consumer goods are purchased. Thus, there is no extra GDP. GDP captures personal consumption expenditures purchased by persons. It doesn’t count private sector employee compensation.
Scenario 2: The federal government hires an unemployed petroleum engineer for $100K per year. After a year, the engineer finds no oil.
GDP increases by $100K. Here, the government does the hiring. Government expenditures which is counted in GDP includes public employee compensation.
In sum, when the government hires people, it raises GDP by virtue of how GDP is defined.
This hints at the artifact in the accounting. But what about the economics? Would more government spending stimulate economic growth?
This claim rests on the Keynesian theory that in economic downturns government can create jobs and put idle capital to use. Unfortunately, without the information contained in profit and loss, government agents are in a position of guessing; and borrowing funds from the private economy where wealth is actually created. Moreover, these decisions are driven by the interests of politicians and not by what is revealed by consumers in the marketplace. My colleague, Matt Mitchell takes a look at the recent claim that fiscal stimulus almost always has positive effects. The evidence is very mixed, and where stimulus is found to be effective, the results are nuanced. One of the biggest problems with government stimulus is that over the long run, government spending eventually crowds out private consumption, investment and borrowing, leading to low growth. Even stimulus advocates, including President Obama’s former advisor, Larry Summers, point to the need for “timely, temporary and targeted” stimulus spending.
The notion of a permanent stimulus to boost GDP on the books is not unlike over-dosing the patient with painkillers while failing to treat the underlying disease: you eventually end up with a corpse.
View all comments (8) | Leave a comment
More Blog Posts by Eileen Norcross
http://spectator.org/blog/2013/01/30/a-look-at-the-latest-gdp-numbe
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mike 3/505| 1.30.13 @ 5:27PM
Only the Government could take "credit" for putting money into the economy, that it took out in the first place. Please!
fmm| 1.30.13 @ 6:11PM
Exactly. The rules highlighted in this example would more rightly be: 1) to count the private expenditure as a growth in GDP and 2) to count the government expenditure as negative, since it took money out of the private sector to begin with.
Bob Grant| 1.30.13 @ 6:53PM
Anyone with half a brain understands fiscal stimulus generates economic activity but not necessarily economic growth.
If you put 300 additional dollars in some government worker's bank account, or an unemployed worker's bank account, consumer spending will increase, at least temporarily.
That's not the question, however. The real questions are at what cost, and how will it affect long-term economic (actual, real) growth and price signaling?
This idea that it is an economic "stimulus" coming from the likes of Pelosi and other lying knuckleheads is a joke.
Bob Grant| 1.30.13 @ 6:55PM
Sorry, that last sentence should have been: " This idea that it is an economic growth "multiplier" coming from ..."
JD| 1.30.13 @ 11:24PM
Any statistic cited by Democrats must be scrutinized for deceptiveness. GDP is another such statistic. Counting government spending but not private employment is just one of its flaws.
aware| 1.31.13 @ 5:58AM
We have "permanent stimulus" and it is fully supported by "conservatives". It's called the Military/Industrial Complex. There's even a writer here that suggests that one less $1500 toilet or $400 hammer would mean WW3.
It used to be called War Socialism and its the kind of socialism "conservatives" love. Cognitive dissonance at its most stark. Like claiming to want "limited government" while rabidly supporting unlimited armies of such "government".
Bob Grant| 1.31.13 @ 8:30AM
Defending the country is one of the few constitutional mandates. But like any government/private sector partnership (military industrial complex), corruption and waste are inevitable.
What's your point?
aware| 1.31.13 @ 10:44AM
My point is simple, "conservatism" is rife with hypocrisy. Opposition to "government" "stimulus" is only 1 example. How does one take seriously your claims of "opposing" Leviathan?
Good of you to accept "corruption and waste" from your overlords like a nice conformist, they've worked hard to get just this mind set in the Hive. At least that money wasn't wasted.