Find a new note from the NAB’s excellent Anthony Kelly on the surprisingly weak recent US GDP print.
What’s behind poor US GDP?
Posted by Houses and Holes in US Economy on February 1, 2013 | 10 comments
Find a new note from the NAB’s excellent Anthony Kelly on the surprisingly weak recent US GDP print.
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I read somewhere that they used a negative deflator (-0.6% ??) as well so could have been worse if they didn’t goose it like we do here.
Why was it a surprise?
So what happens when spending is reduced or, failing agreement, sequestered, beginning on 1 March?
I understand that a 0.5% to 1% hit to GDP is likely from the government fiscal consolidation from sequestration.
My libertarian friends tell me that government spending has no effect on production (fiscal multiplier zero). Real GDP was unchanged because that’s what people wanted, apparently.
Your friend is 100% correct. Only investment and production can grow an economy. Consumption is, by definition, the destruction of wealth. Cuts to government spending, when that spending is on consumption, has no net effect on real GDP or the production within an economy.
The idea that government spending on consumption can somehow grow an economy out of a recession is probably the biggest economic fallacy ever pushed.
There was a little event called the Presidential Election in Nov 2012.
Did not do Obama any harm to bring ‘Defence’ spending forward to Q3 before the poll and ‘correct’ it in Q4 which now appears after the poll.
Great analysis here:
http://www.forbes.com/sites/beltway/2013/01/30/think-consumption-is-the-engine-of-our-economy-think-again/
An exert:
“The past several decades in America have been marked by a collapse of real savings encouraged by artificially easy credit from the Fed, along with explosive growth in government spending. All these combined to bring about a debt-fueled spending binge, with disastrous consequences.
Increased investment drives economic growth, while retrenched investment leads to recession and reduced employment–and it always has. Those who blame our stagnation on a lack of consumer demand rely on a toxic brew of dubious data and dangerous theory.”
Well worth a read.
“Those who blame our stagnation on a lack of consumer demand rely on a toxic brew of dubious data and dangerous theory.”
Absobloodylutely!
Mind you the theory is not just dangerous. It is catastrophically wrong.
It’s not just dangerous and catastrophically wrong, it’s also conveniently wrong – we must have private bank credit debt or die.