How Washington Is Dragging Down the Economy: Ritholtz Chart

The past two days have seen two positive surprises in economic data. Yesterday, the gross domestic product came in at 2.8 percent growth, significantly better than consensus expectations of 2 percent. This morning, payrolls jumped by 204,000 workers, against median estimates of 163,000.

Now imagine how much better the underlying economy might be if the federal outlays were not contracting.

What’s that you say? Isn’t government spending out of control?

No, as it turns out. It is actually shrinking -- and not at an especially good time. That is according to Paul Kasriel, the former chief economist at Northern Trust, and now working in quasi retirement at Econtrarian.

Kasriel points out that government spending ballooned during the most severe recession since the early 1930s -- up 17.9 percent in fiscal 2009 -- as spending on the Troubled Asset Relief Program and other bailouts skyrocketed, along with unemployment and food stamps.

What should have followed was a more normalized Federal expenditure rate showing 3 percent to 4 percent annual increases in outlays. Instead, he notes, “In three of the subsequent four years following FY 2009, total federal outlays contracted, by -1.7%, -1.8% and -2.3% in FY years 2010, 2012 and 2013, respectively.” The last time we saw anything remotely like this sort of Federal spending contraction was a 0.25 percent decrease in 1965.

Washington has a spending problem: It is not doing enough of it to put people back to work. And those folks who are claiming that spending has run amok either don’t know the facts or don’t care about them.

This morning, I cautioned putting too much emphasis on any one data point, and advised looking at the longer term trend. As the facts clearly show, the long term trend is that the U.S. government has cut back its spending at just the wrong time as we try to recover from the great recession.

Imagine how great economic growth would be if the U.S. government wasn’t a drag on the economy.

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