A Good GDP Tradeoff: Net Exports Up; Government Spending Down

When I look under the hood of GDP reports, the fly in the ointment I usually find is inventories. In the third quarter last year, for example, removing inventory accumulation reduced the headline real GDP number of 4.1 percent to 2.5 percent in final sales. The estimate for real GDP in the fourth quarter also benefited from inventory accumulation, but not as much. It reduced the real GDP increase of 3.2 percent to a 2.8 percent final sales number—close enough. Happily, it shows growth accelerating from the third quarter to the fourth quarter rather than decelerating.

The most interesting thing about the latest estimates to me was the sharp decline in federal government consumption and investment and the sharp increase in net exports. This significant shift from government spending to private sector spending has not received much attention—not nearly as much as the parallel shift in employment.

Real federal government spending declined at a 12.6 percent rate in the fourth quarter, led by a 14 percent decline rate in defense spending. State and local government spending barely increased at a 0.5 percent rate. The increase in exports of goods and services in the fourth quarter came to 11.4 percent, with imports rising only 0.9 percent. Those of us who prefer a smaller government role in the total economy should be pleased. I am, but I would prefer that the decline not be led by defense.

Comments (13)

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  1. Mark Pinnata says:

    Unfortunately other than defense, there isn’t much else to cut; unless you want to touch that 3rd rail of politics, SS and Medicare (which actually should be addressed.)

    As you probably know, federal discretionary spending vs GDP is near a historic low. In fact our lack of spending on infrastructure, including roads, bridges, rails, water and sewage systems, is one of the key factors which is negatively impacting the middle class and the economy. It also has a negative effect on productivity.

    This type of spending creates not only construction jobs, but also engineering, finance and supply chain management jobs. Additionally all the 1st derivative and 2nd derivative jobs such as retailers who sell to these employed people, and the manufacturers who sell hard goods and materials to the construction companies, contribute to economic growth.

    As you know, the money multiplier effect on this type of gov’t spending is dramatically higher than that generated by the increased spending on SS and Medicare. (The increased spending due to baby boomers retiring and longer life spans.)

    This creates a rarely discussed conundrum. Younger, working people spend more money, and spend it more quickly, than older retired people. They are the ones who are buying new homes and furnishing them. They are the ones who buying more cars because they use them more often. This all contributes to economic growth

    So given the fact that federal spending on projects which benefit younger, working age people will generate more economic growth, and given that federal spending which benefits older, retired people generates less economic growth, what is the obvious course of action…?

    Therefore I would prefer to see much greater and immediate federal spending on infrastructure including R&D and NASA, in order to give this economy a kick in the pants. Conversely we have to start looking to reduce spending on Social Security (using chained CPI) and Medicare (which admittedly entails difficult decisions).

    I have been a financial advisor for a number of years, but based on my math and engineering background, these solutions seem obvious. ( I don’t know why the velocity of money, its demographic breakdown, and its current negative economic effect, is not spoken about more often by economists).

    However I know that the politics of this solution are not favorable. Our local congressman recently told me that 48 cents of ever federal tax dollar spent goes to people age 65 or older.
    Too many of the talking heads just want to talk about slashing federal spending, as well as scaring senior citizens. (I know that this is what drives TV and Radio ratings.)
    Too few people want to talk about actual facts; and once you start talking about economics and try to even introduce mathematical concepts, eyes glaze over.

    Ironically the chained CPI savings from Social Security was supported by Mitt Romney when he was a candidate, and was in Obama’s proposed budget this past year.

  2. Jonathan Gal says:

    Interested in your thoughts:

    Was the Jan. unemployment report manipulated by the Fed in order to prevent a rout in the bond market?

    The ADP report showed 200,000+ new jobs, but the government report showed only 60,000.

  3. Benjamin Cole says:

    Bob McTeer:

    If you read between the lines of Bob Gates book, even he thought there should be cuts in defense, and no more wars in Asia (ala Eisenhower).

    I say cut defense–and the rest of the federal budget too.

  4. sean says:

    You should be looking at the overall trade balance. The =trade= deficit is what is draining our economy. I realize you know we need both imports and exports, but in order for it to be healthy, it needs to be even. It would add around 500B+ to our economy every year if it was even, we would have a ~500B yearly economic stimulus, and we wouldn’t need any to add debt for economic stimulus packages.

    BTW. I found this site, looking for the joke about the 100 dollar bill that gets passed around at the hotel that you mentioned. What everyone seems to forget about that joke is that each person has to pay income tax on that 100 dollars. At a tax rate of 20%, the original stranger gets his 100 dollar bill back, everyone’s debts are settled, but the government collects 20 dollars for each transaction.

    It is ironic that someone with an Economic Policy blog, can’t figure that out.

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