The “surprise” report about GDP contraction in the fourth quarter of 2012 (Oct-Dec) that had all the usual suspects celebrating bad economic news shouldn’t have been a surprise at all. Rather, it’s what Keynesian economics predicts to happen.
The explanation for why it happened tracks perfectly with arguments that serious (as in actually serious, not pretend serious) economists have been making since the recession began, and debunks virtually every argument made by conservative economists and Republicans.
Before explaining the cause, consider the two arguments:
1. Every dollar of government spending crowds out a dollar of private spending. So cutting government spending in a recession will increase confidence in the investment sector and lead to businesses hiring more people and increasing output as private investment fills the hole left by government cuts. GDP should increase and jobs growth should accelerate. On the flip side, increasing deficits should scare the private sector, reduce private sector investment and spending, increase interest rates and inflation.
2. Cutting government spending in a special type of recession where demand is suppressed, like the one we have now, will leave an unfilled hole. Businesses won’t hire or increase spending because they only do that in response to increased demand, not confidence scams. GDP growth should slow down, or even contract. On the flip side, increasing deficits and government spending shouldn’t compete with the private sector and interest rates and inflation will either fall, or remain low.
Now consider what just happened in the last three months (not including January). The fiscal cliff wasn’t the tax increases so much as they are sequestration, automatic spending cuts to defense and non-defense discretionary spending, totaling $100 billion per year. Everyone finally acknowledged that allowing those cuts to happen would be bad, even if we need to do it and end up doing it later, the main issue was cutting spending when the economy was growing but still in a rather fragile state, and cutting so much so quickly.
Now, about what caused the GDP contraction: the Pentagon cut spending on its own in order to give itself better control over its operations if we went over the fiscal cliff and it saw its nearly $700 billion budget cut by $50 billion this year, a 7% drop. Simply put, the Pentagon enacted a much smaller version of the fiscal cliff by itself to give itself some room to breath, and the result of a reduction in defense spending much smaller than the fiscal cliff will bring was the first economic contraction since probably 2009.
Now ask yourself, given the facts, which of the two arguments/scenarios that I listed above were more accurate? We had a sizable drop in defense spending in 2012Q4 (but job growth). According to argument #1, espoused mainly by Republicans, conservative think tanks, and talking heads, job growth and GDP should have increased. But neither of those things happened. Job growth was steady and predictable and GDP actually went negative. According to argument #2, GDP should have either slowed or gone negative.
The fiscal cliff itself proved basically all of conservative faith-based economics to be wrong, and confirmed (yet again) that Keynesian economics works. The unfortunate news about GDP in the final quarter of last year does the same thing since it was basically a mini-fiscal cliff itself.
Anyone you see blaming that report on President Obama’s policies is either lying to you, or sincerely doesn’t understand what’s going on. That report is a pure repudiation of conservative austerity policies and yet another confirmation of Keynesian economics.
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To further address the idiots still inhabiting the Breitbart sewer, this was the title of the story I linked to in the first paragraph of this post:
Negative Growth: Economy Tanks in Fourth Quarter
That is a flat out lie, the kind we’re all used to from the Breitbart fraudsters. Consumer spending was up in Q4, the economy added 453,000 jobs, and unemployment fell 0.1 points. The private sector economy (the parts not marginally attached to the federal government, if you will) grew just fine. GDP contracted solely because government spending on defense contractors decreased, not because businesses decided to start firing people and scale back supply. That demonstrably did not happen. We’d have seen job loss or slowing hiring, not stable hiring:
Jul: +181,000 (Q3)
Aug: +192,000 (Q3)
Sep: +132,000 (Q3)
Oct: +137,000 (Q4)
Nov: +161,000 (Q4)
Dec: +155,000 (Q4)
ADP, a private firm that usually is within the ballpark, is projecting around 190,000 new jobs in January, the best growth we’ve seen since last summer and the second best month since February of 2012. It’s also possible that GDP for 2012Q4 could even be revised upward into growth by spring, just from having more accurate data. (It could also go down, to be fair.)
I repeat what I said above: anyone telling you that President Obama’s policies “tanked the economy” in 2012Q4, or tells you that it tanked at all, simply does not know what they are talking about, or is lying to your face for their own political benefit.