Discussion: (7 comments)
Comments are closed.
A public policy blog from AEI
Another big decline in US government spending took its toll on first-quarter output. But the way to accelerate GDP growth is by boosting the private economy, not re-inflating the public sector.
The nation’s gross domestic product, adjusted for inflation, grew at an annualized rate of 2.5% in the year’s first three months. Hardly a great number given the huge gap between GDP’s pre-recession trajectory and where we are now. (See above chart). The economy is not growing fast enough to close that multi-trillion dollar growth shortfall (or a similar one in the job market). And last quarter might be the strongest of the year.
But consider: The data continue to suggest a tale of two economies. Real GDP growth has averaged only 1.4% over the past two quarters, notes RDQ Economics. But private-sector GDP — excluding government consumption and investment — grew 4.0% in the first quarter and has averaged 3.0% over the past two quarters — about what it did from 1983-2007. Falling government output is what’s tamped down the overall growth number. In the first quarter alone, the 4% decline in government spending knocked a point from GDP. Indeed, government has subtracted from GDP for 10 of the last 11 quarters.
But is that a bug or a feature of this recovery? The decline in government spending — the sharpest year-to-year contraction in real federal outlays since Ike’s Korean War demobilization — continues and is no doubt taking some toll on private-sector growth. The fiscal cliff tax hikes, too. Yet not only is the private sector growing at trend, but job creation is averaging 200,000 month. Not a boom, but not stagnation, either.
The wisest next step isn’t another massive fiscal stimulus simply to boost government’s contribution to GDP. Longer-term, smaller government — provided that there is enough spending on public goods like defense and basic research — is good for the economy. (Most recent studies finding a negative correlation between government size and growth.) Expand the most productive bits of the economy, not the least efficient ones.
US spending austerity — though some should be offset by entitlement savings — is roughly on the right trajectory. What’s needed now are measures to aid business, including tax cuts and more high-skill immigration, as well as continued monetary easing.
Special thought also should be given to the long-term unemployed. Skill degradation and workplace bias might mean a rising tide won’t lift their boats. AEI economist Kevin Hassett recommend policymakers investigate a number of options, including tax subsidies for hiring, workplace sharing programs, and helping workers move to areas with higher job growth.
Growing the economy doesn’t have to mean growing government.
Comments are closed.
1150 17th Street, N.W. Washington, D.C. 20036
© 2015 American Enterprise Institute for Public Policy Research