March 29, 2024

Economix: The Role of Government Spending

As Congress continues to wrangle over a debt reduction bill that will inevitably cut government spending, Friday’s estimates of second-quarter gross domestic product provided a sobering look at how a decline in public spending and investment can restrain growth.

G.D.P. grew at an annual rate of just 1.3 percent in the second quarter, according to the Commerce Department, well below consensus forecasts. First-quarter growth was revised down sharply to just 0.4 percent from an earlier estimate of 1.9 percent.

The astonishingly slow growth rate from April through June was due in large part to sluggish consumer spending and an increase in imports, which subtract from growth numbers. But dwindling government spending also held back growth.

While federal government spending increased by 2.2 percent in the second quarter, that was all because of a jump in military spending. Excluding military, federal government spending and investment fell by 7.3 percent, a much larger fall than in the previous quarter. State and local government spending, which has been a crimp on growth throughout most of the official recovery, fell by 3.4 percent.

The figures will inevitably put further pressure on Congress as it tries to come up with a plan and figure out just how many billions of dollars can be shaved out of the government’s budget.

“A weak economy will only make the tough decisions on the budget even more difficult,” Nariman Behravesh, chief economist at IHS Global Insight, wrote in a research note Friday, “and the case for fiscal austerity in the near-term even weaker.”

On the other hand, said Steve Blitz, a senior economist for ITG Investment Research, policy makers have to decide whether to continue to pump up the economy through government spending or figure out a way to spur the private sector.

“We are probably at as important an intersection of policy and the economy as we were in late 2008 and early 2009 when the economy was collapsing,” Mr. Blitz said.

Mr. Blitz favors reforming tax policy and aggressively pursuing foreign markets for American goods. But, he said, the only real prescription is to wait. With so many households still working off the debt accumulated during the boom years, he said, “that’s just going to take time to work out, and you can’t cheat the process.”

Article source: http://feeds.nytimes.com/click.phdo?i=ce5b9dc83b7cd673f90d16f10683a65e

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