…because I’m an economist and a mom–that’s why!

Spender of Last Resort

February 27th, 2009 . by economistmom

Let’s face it.  It’s not a claim or a forecast–it’s reality:  our government is the only one buying things these days.  Today’s GDP report estimates that our economy shrunk at an annual rate of 6.2% last quarter–far worse than the prior estimate of a 3.8% decline.  And it breaks down this way:

  • Personal Consumption fell 4.3%, contributing 3.01 percentage points to the 6.2% overall decline (nearly half).
  • Private Investment fell 20.8%, contributing 3.11 percentage points to the overall decline (there’s the other half).
  • EXports fell 23.6% (contributing 3.44 percentage points), and IMports fell 16.0% (offsetting by 2.99 percentage points), so that net exports (X-M) contributed 0.46 percentage points to the overall decline.
  • Government purchases of goods and services rose by 1.6%, with federal purchases rising 6.7% and state and local purchases falling by 1.4%.  Government was the only positive contributor to GDP last quarter, on net adding (just) 0.32 percentage points to the GDP growth rate.  (Federal was +0.50; state and local was -0.18.)

The GDP data highlight the fact that despite federal government purchases rising at a 6.7% rate last quarter, it hardly made a difference.  It only offset the massive 6.76% drop in the rest of GDP by a half of one percentage point.  Why?  Because federal government purchases of goods and services last quarter were just 7.8% of our total economic activity (GDP)–at an annual rate, just over $1 trillion out of a $14 trillion economy.

So people are complaining and will continue to complain about the federal government extending its reach and getting bigger and taking over the economy–but I ask:  what choice do we have right now?  The federal government is the only one able to demand and purchase the goods and services our country is already able to immediately produce–the only one with the resources to put that idle capacity to work.

So while the Republicans may not like this trend and the overall direction the Obama Administration will take our economy in terms of an expanding role of government, I fully expect that their complaining about the higher taxes required to fund the (inevitably) higher spending will only lead to bigger budget deficits and more fiscal irresponsibility–not to a smaller government than would otherwise be the case if they just kept quiet about it.  And as Bruce Bartlett puts it today, when Republicans complain about higher taxes, it’s really just “crying wolf”:

Yesterday, President Obama issued his first detailed budget. Among its most controversial proposals is a significant increase in taxes, especially on those with upper incomes. Obama also proposes a cap-and-trade system to reduce pollution that is in essence a broad-based energy tax.

Republicans will undoubtedly make extravagant claims about the detrimental economic effect of these higher taxes. When one hears these claims, however, it is worth remembering that they said the same things in years past and none of their dire predictions came to pass.

So these same-old Republican complaints about how higher taxes will “kill” the economy are especially obstructionist and counterproductive today given our clear reliance on the federal government as the “spender of last resort.”

One Response to “Spender of Last Resort”

  1. comment number 1 by: Jim Glass

    It’s worth noting that the bulk of the 6.2% rate GDP fall (reports I’ve seen say as much as 80%) was due to the plunging price of energy and commodities during the quarter.

    That makes things look rather less alarming because (1) that fall is over, this is not a continuing thing, and (2) consumers have benefitted by the amount of this price fall (even if they haven’t spent their savings — savings are good too.)

    Also, the new budget predicts 3.2% growth next year, 2010, the second highest rate of the last 10 years — which indicates the Obama Administration at least actually believes we are in a normal scale recession, nothing like “the worst since the Depression.” Reassurance. ;-)