How the GDP's Big Shrink Might Impact a Budget Deal
U.S. gross domestic product fell by 0.1 percent in 2012's fourth quarter, and analysts are chalking up the losses to reduced government spending — especially on defense. Will evidence about downsized federal budgets shrinking GDP change how lawmakers approach the budget fight?
U.S. gross domestic product fell by 0.1 percent in 2012's fourth quarter, according to advance estimates released by the Bureau of Economic Analysis this morning. Economic analysts are chalking up the losses to reduced government spending—especially on defense, which saw a 22.2 percent decrease in government consumption expenditures. Conservatives are predictably upset at the lackluster report, blaming President Obama's economic policies for the lack of growth. How could they pass up this opportunity, seeing how it's the first time the country's economy shrunk since Q1 in 2009? But liberals are saying that deficit-hawk austerity is to blame for GDP decline. Will evidence about downsized federal budgets shrinking GDP change how lawmakers approach the budget fight?
This all makes the spectre of sequestration—the fiscal cliff holdover cuts scheduled to take effect in March unless lawmakers reach a deal to avert them—loom larger in Washington. The Chairman of the Council of Economic Advisers Alan Krueger even argued today on the White House blog that these federal defense spending cuts were "likely due to uncertainty stemming from the sequester." If a 22 percent cut in military spending (a product of American wars winding down in the Middle East) can hurt GDP this much, god forbid what $1.2 trillion in across-the-board cuts could do to the economy. The Bipartisan Policy Center's Steve Bell writes:
The “fiscal cliff” now gives way to “sequester anxiety.” These across-the-board cuts in Fiscal Year (FY) 2013 spending loom as the next fiscal hurdle for policymakers ... For an economy that already suffers from chronic unemployment and very slow expansion, the sequester could push the nation into sub-2 percent GDP growth for 2013 and perhaps 2014.
Even with such doom and gloom on the horizon, Republican House Budget Chair Paul Ryan predicted over the weekend that sequestration will go through. Ryan said on NBC's Meet the Press, "We think these sequesters will happen because the Democrats have opposed our efforts to replace those cuts with others and they’ve offered no alternatives." Earlier this month, Sen. Chuck Schumer took to the same Sunday talk show to reassure the public that Democrats will pass a budget deal that averts sequestration. He told David Gregory, "We're going to do a budget this year, and it's going to have revenues in it, and our Republican colleagues better get used to that fact." However, even with this new report's insights into the link between federal spending and GDP, history has shown time and time again that congressmen don't necessarily care about what economists say.