Last Thursday’s revisions to the first-quarter growth estimates showed little change: Gross domestic product (GDP) had grown at a 2.4 percent rate, not 2.5 percent as reported in the initial estimate. For those who mistakenly equate GDP and “the economy,” this is bad news—and an excuse to kvetch about sequestration.
Economists, however, know enough to look for more details. GDP is just one out of many indicators of the economy’s health, and it is a simple sum of many components.
The rest of the report showed that the trends in GDP’s components were even more divergent than initially reported. Consumer spending—the bulk of the economy—rose at a 3.4 percent rate. Government spending shrank over the quarter at a 4.9 percent rate, mostly due to a 12 percent drop in defense spending. The higher estimate in consumer spending (0.2 percent higher) counterbalanced a lower estimate of government spending (0.8 percent lower).
If there is any message from the first quarter numbers, it is that the economy does not rise or fall with government spending. Although government spending can move GDP up and down mechanically in the short term, its relationships to other components of the economy are organic, and reflect the interaction of the many markets and decision makers who comprise our great economy.
Evidence from decades of research shows that government spending cuts can be beneficial both by reducing the deficit and by unleashing growth from the private sector. In a time when debt and future obligations threaten to drag down long-term economic growth, there is no greater priority than allowing self-sustaining growth in the private sector.