When Austerity Doesn't Look So Austere

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I keep hearing about the deleterious effect cuts in government spending are having on the U.S. economy. The Federal Reserve said as much in its statement following today's meeting. I decided it was time to take a peek at the data.

In nominal terms, federal government spending and investment, as reflected in the Bureau of Economic Analysis's National Income and Product Accounts, has been relatively stable since U.S. President Barack Obama took office. It was $1.2 trillion in the first quarter of 2013 compared with $1.1 trillion in the first quarter of 2009. In inflation adjusted terms, government spending shows little change in the past four years. Compared with the peak of $1.1 trillion in the third quarter of 2010, however, it is down 10 percent to $983.2 billion.

These numbers are not the same as federal outlays in the budget, which last year totaled $3.6 trillion.

Keynesians believe that spending is spending. It matters little whether the government invests in infrastructure or subsidizes the NFL. A dollar spent is a dollar to be multiplied. InChapter 10, Section VI of "The General Theory of Employment, Interest, and Money," John Maynard Keynes advocated building pyramids as a cure for unemployment. In fact, "Two pyramids, two masses for the dead, are twice as good as one," he wrote in the 1936 treatise.

All spending by the federal government does not go toward gross domestic product. Only consumption expenditures (defense spending and salaries, for example) and gross investment (in structures, software) are included. (Table 28-1 on page 471 of the White House Office of Management and Budget's Technical Budget Analysis provides a nice breakdown.) Transfer payments -- to states and for Medicare, Medicaid and Social Security -- and interest on the debt are not included. In other words, the biggest share of the federal budget isn't reflected directly in the GDP accounts.

It does show up indirectly. States spend the money they get from the federal government, which appears as state and local government spending. Recipients of federal government social benefits may save or spend the money. If it's the latter, their purchases show up as consumer spending, the biggest component of GDP.

Of all the measures that the BEA produces, the one that most closely reflects federal budget outlays is "total expenditures" (See Table 28-1 above). For fiscal 2012, BEA's total expenditures were $3.8 trillion, projected to top $4 trillion in 2014. That compares with the Congressional Budget Office's $3.6 trillion (2012) and $3.8 trillion (2014). The CBO estimates are based on current law, which includes the automatic cuts to discretionary spending that went into effect this year.

The automatic cuts may not be smart, but they are being more than offset by entitlement spending. So the next time someone complains about the contractionary effect government spending is having on the U.S. economy, at least from a macroeconomic perspective, ask him to show you where.

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