Spending cuts in Washington are hurting the economy and they are responsible for the current slowdown of the recovery. This is the conclusion of the conservative American Enterprise Institute (AEI).
The AEI has released new data today that shows cutting government spending is offsetting gains in the private sector. Public sector GDP — a measure of the goods and services produced by the government — has shrunk for eight consecutive quarters, according to AEI. At the same time, private sector growth has increased for 12 quarters in a row.
Obama was right after all when he said “the private sector is doing fine.” That was the suggestion of Mark J. Perry in the American Enterprise Ideas (AEI) blog released Monday. Perry reported:
“We’ve been tracking real “private” GDP (real GDP excluding government purchases), which grew at a 2.2% annual rate in Q2 and is up 3.3% in the past year.
In the second quarter of 2012, ‘public sector GDP’ decreased -1.44%, and that was the eighth straight quarter of negative growth for total government spending, averaging -2.88% per quarter over the last two years.
In contrast, there have been 12 consecutive quarters of positive growth for private sector GDP averaging 3.07% per quarter in the three years since the recession ended, which is slightly higher than the 2.8% average growth rate in private real GDP over the last 25 years.
So maybe it’s true that the ‘private sector is doing fine’ and most of the sub-par economic growth measured by real GDP is simply reflecting the decreases in government spending, and not weakness in the private sector?”
The American Enterprise Institute is spot on. The reason the recovery has been weaker than previous recoveries is that Congress has done everything in its power to slow the recovery by its policies and failure to enact policies that would help the economy.
If we dive deeper into the AEI analysis we find evidence to back up the assertion that Congress is to blame.
In the first quarter of 2008, public sector GDP was positive off setting negative private GDP. (See the chart above). Government spending delayed or reduced the impact of the collapsed private sector growth.
In 2009, when the stimulus was enacted, public sector GDP spiked off setting negative private GDP. This continued until the stimulus ran out in late 2010. When that happened public GDP went negative where it has remained every since. This pulls down overall GDP.
If government spending between 2010 and now would have remained at the levels under Bush, as a percentage of GDP, private GDP would have stayed positive. Had that happened, overall GDP would be stronger than it is. This would have gone a long way to wipe out the 8.2% unemployment rate.
There are two reasons the stimulus really did stop the bleeding from the recession and begin the recovery, despite Republican rhetoric. One is that about 40% of the stimulus was actually not spending but tax cuts for the middle class and small businesses. That put money back into the economy which stopped the decline.
The second reason is that the balance of the money was spent on programs that created jobs in the public and private sector. A large portion of that money went to local and state governments to re-hire teachers and first responders that had been laid off.
Congress has refused to enact any simulative jobs programs and failed to enact any infrastructure programs that would put people back to work. At the same time, Congress has cut spending. Government spending pays the salaries of public employees from teachers, to police officers; construction workers to engineers; nurses to social workers.
Government spending also pays the salaries of workers in private businesses that provide goods bought with government spending. When government spending is cut, people in the public and private sectors lose jobs. That spirals downward affecting the entire economy.
Spending cuts do not create jobs. Republicans know that because they claim the sequester will result in 2,000,000 lost jobs. If spending cuts did not cause job losses, they wouldn’t make that argument.
AEI is not a liberal Keynesian organization. If has looked at the facts and came to that same conclusion. Congress can fix this!
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