The fact that the US economy contracted by 6.1% in the first quarter of 2009 is crappy, but only slightly surprising. This, on the other hand, is pretty strange:
Federal government spending decreased 4.0%, after rising in the fourth quarter by 7.0%. State and local government outlays fell 3.9%, after going down by 2.0% in the fourth quarter.
Why on earth is federal government spending falling, after rising last quarter? The whole Keynesian theory, love it or leave it, is that an increase in government demand can make up for a decline in private demand. So where's that increase in government demand?
One answer is in the Bureau of Economic Analysis's Technical Note on the first-quarter data -- an answer that is, as the name of the note implies, fairly technical: Some of the big government expenditures -- like TARP -- are counted as capital transfers and not purchases. And the big spending programs from the stimulus bill haven't hit the bloodstream yet. But that still leaves a small mystery: why did federal government spending go up so much in the fourth quarter of last year, even as GDP contracted and local spending declined?
Here's a theory. Much of the increase and decline in spending had to do with defense-related consumption and investment. I am trying to get into the habit of making more charts, so I made a chart of what this looks like (the numbers on the left are in billions of dollars):
So why did defense spending increase rapidly in the second half of last year? One thought is that this had something to do with the election: a big boost in military spending will temporarily boost GDP and make the incumbent party look good, or at least better than it otherwise would.