A recent Washington Post column by Ezra Klein dreamed up a new excuse for the conspicuous failure of Obama’s so-called stimulus plan. Klein argues that the stimulus of federal spending has been offset by the “anti-stimulus” of fiscal austerity by state and local governments. For proof he quotes Bruce Bartlett, who is fast becoming the favorite go-to guy for liberals seeking conservative allies in their endless quest for more spending and taxes.
Bartlett says, “When the history of the current crisis is written, much of the blame will be placed on the sharp fiscal contraction of state and local governments. I think economists will view this as a preventable error equivalent to the Fed’s passive shrinkage of the money supply in the early 1930s.”
A historian himself, Bartlett imagines this to be a question that will have to be pondered by historians in the distant future. But it is easy to identify each sector’s direct contribution to the overall growth rate of real GDP from a St. Louis Fed publication, “National Economic Trends.”
State and local government spending was rising during the first three quarters of the recession, and the drop in the fourth quarter of 2008 accounted for just 0.25% of the 5.37% annualized decline in GDP. In the first quarter of 2009, state and local spending subtracted just 0.19% from real GDP, but federal spending subtracted more (0.33%) due to cuts in defense spending. Government obviously made only a minor contribution to the 6.4% drop in overall GDP.
In the second quarter of 2009, state and local spending was way up (by 0.48%), as was federal spending (0.85%). But the private economy did not begin expanding until the third quarter – when government spending stopped diverting so many resources to unproductive uses.
The table shows that government spending on goods and services had nothing to do with the recovery (transfer payments don’t contribute to GDP).
As a matter of simple accounting, the state and local sector has been a very minor negative force −scarcely comparable to the Fed’s inaction in 1930-32.
Federal purchases, whether for heavily-subsidized ”green jobs” or shovel-ready pork, have been virtually irrelevant during the last two quarters.
Contributions to Real GDP Growth
…………………….. 3rd…… 4th…… 1st qtr
Real GDP 2.2 5.6 3.0%
Private 1.6 5.8 3.4
Federal 0.6 0.0 0.1
State & Local -0.1 -0.3 -0.5