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Economy Declined as Government Spending Rose

In the wake of stunning news that the U.S. economy shrunk by 0.1% in the last quarter of 2012, prominent media outlets and commentators are reporting that lower government spending is the cause of the economic decline. In reality, however, government spending rose by 0.8%, and the claim that it fell stems from a federal report that defines "government spending" so narrowly that it excludes 47% of all government spending.

On January 30th, the U.S. Bureau of Economic Analysis (BEA) issued a preliminary report stating that gross domestic product (GDP) decreased by 0.1% in the fourth quarter of 2012. The report emphasized that this is an "advance estimate ... based on source data that are incomplete or subject to further revision..." The report also stated that the decrease in GDP "reflected negative contributions from private inventory investment, federal government spending, and exports..."

Seizing upon the "federal government spending" aspect of this report, some journalists, commentators and organizations have claimed that reduced government spending is dragging down the economy. This was the focal point of a combative exchange on CNBC between on-air editor Rick Santelli and senior economics reporter Steve Liesman. Attributing the decline in GDP to left-leaning government policies, Santelli stated, "When you act like Europe, you get growth rates like Europe, and our discussions with economists sounds like we're in Europe!" To which Liesman shot back, "We reduced government spending by 15 percent! That's not Europe!"

In fact, government spending rose by 0.8%, and the decline that Liesman and others are citing only applies to a narrow segment of spending that excludes most social program benefits. This is shown in BEA's report on GDP, which reveals that the "government spending" in this report consists of "government consumption expenditures and gross investment." This is merely a subset of government spending that excludes 69% of all federal spending and 20% of all state and local spending. As BEA explains in its "Primer on Government Accounts" and its webpage on measures of government spending":

  • "Consumption expenditures include what government spends on its work force and for goods and services, such as fuel for military jets and rent for government buildings and other structures."
  • "Gross investment includes what government spends on structures, equipment, and software, such as new highways, schools, and computers."
  • "Government consumption expenditures and gross investment ... is a measure of government spending on goods and services that are included in GDP."
  • "Total spending by government is much larger than the spending included in GDP."

In sum, what BEA categorizes as "government spending" in its GDP reports doesn't include items such as unemployment benefits, food stamps, welfare payments, subsidized housing, Medicaid benefits, Social Security benefits, Medicare benefits, foreign aid, and interest on the national debt. This amounts to 47% of all federal, state and local government spending, largely consisting of social programs that advocates for more government spending say will spur economic growth.

The BEA report in question estimates that "government spending" declined by 15% in the fourth quarter of 2012, consisting of a 22% decline in national defense, a 1% increase in other federal spending, and 1% decrease in state and local spending. Again, these figures are preliminary, they only apply to selected categories of government spending, and real total government expenditures actually increased by 1%.

Hence, if one were to draw a simplistic conclusion from this data (as reporters and analysts have done), an accurate assessment would be that increased overall government spending-with more spending on social programs and less on national defense-accompanied the decline in GDP.

It is important to note that the above-cited figures are comparisons between the third and fourth quarters of 2012, and quarterly figures on government spending tend to fluctuate. Thus, when journalists and commentators focus on short-term data as they have done in this case, they obscure the larger picture of what has taken place in the past several years and over the longer term. Consider the following.

As shown in the graph below, total government spending rose dramatically in 2008 and 2009 and has since consumed more of the nation's economy than at any time since 1960, which is as far back as this BEA data goes. BEA also tracks a slightly less inclusive measure of government spending (called current expenditures) that dates back to 1929. By this measure, government spending consumed more of the nation's economy during 2009-2011 than ever recorded in the history of the nation, including the peak of World War II. And in 2012, current spending was just a hair below the peak of World War II.

Combined Federal, State & Local Government Spending

James D. Agresti is the president of Just Facts, a nonprofit institute dedicated to researching and publishing verifiable facts about public policy.


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