The Debate Over What's Slowing the U.S. Recovery

Should we blame government spending cuts or rising oil prices for lowering the 2011 GDP growth forecast?

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The Commerce Department has lowered its estimate for fourth-quarter U.S. economic growth from 3.2 percent to 2.8 percent, surprising many analysts who were expecting the government to raise the estimate slightly. The downward revision primarily stems from weaker consumer spending, more imports, and lower state and local government spending than initially predicted for the last three months of 2010.

It's this third factor--government spending--that's provoking the most discussion among pundits. Why? As the U.S. fitfully recovers from the 2008 recession, some on the left--most prominently Paul Krugman of The New York Times--have argued that cutting government spending will hinder economic growth and tempt another recession, while others on the right claim that the government must rein in spending to address the mounting budget deficit. This debate is at the center of the federal budget standoff in Congress that may soon devolve into a government shutdown. Now, those who oppose austerity measures are looking at the effect of lower state and local government spending on economic growth and wondering: Were they just proven right?

The Washington Post's Ezra Klein thinks so. The government's spending too little, he says, and that's holding the economy back: "When the government cuts back on its purchases and investments, it's the same as a substantial portion of the population cutting back on its investments and purchases." The Economist's Ryan Avent adds that the news should prompt fiscal and monetary authorities in the U.S. to ask themselves whether they've overestimated "their ability to handle big, and largely unnecessary, short-term budget cuts."

The Washington Monthly's Steve Benen goes further, arguing that the news belies the GOP's very economic model. Congressional Republicans want to replicate state and local government spending cuts at the federal level, he states, but they must not be "paying close enough attention to current events. In England, British policymakers cut spending and it slowed their economy. In Germany, German officials cut spending it slowed their economy. In American cities and states, officials cut spending, it slowed the broader national economy."

But data, of course, is in the eye of the beholder. Even more so when it's government data. At the conservative blog Hot Air, Ed Morrissey barely mentions state and local government spending in his write-up of the news. Instead, he focuses on how higher oil prices will likely hurt consumer spending going forward: "If we were pumping our own oil in the Gulf and off the coasts, we would not only have hundreds of thousands of more jobs, we would also have insulated ourselves a little better from the price effects of turmoil in the Middle East. Our GDP might be going up instead of sideways at this point."

This article is from the archive of our partner The Wire.