January 27, 2012

AP’s Crutsinger Falsely Claims ‘Sharpest Government Spending Cuts in 40 Years’ Hurt GDP

In two items about today’s report on economic growth from the federal government’s Bureau of Economic Analysis today, Martin Crutsinger claimed that today’s lower-than-expected annualized growth of 2.8% during the fourth quarter of 2011 (vs. expectations of 3% or higher) was hurt because of big “cuts” in government spending, especially federal spending — supposedly the biggest cuts in 40 years. I guess the underlying message is supposed to be that Congress shouldn’t try to reduce federal programs any more, because already they’re allegedly being cut at historic rates.

Baloney. Crutsinger was either being incredibly ignorant by assuming that all government spending is part of GDP (it’s not; only government purchases of goods and services are components of GDP), or he deliberately deceived his readers. At the federal level, purchases of goods and services and “investment” are only about 30% of all government spending. Total spending has hardly gone down at all. Here are the respective relevant paragraphs in his two reports:

8:45 a.m. (saved at web host; “Economy grew modest 2.8 pct. in Q4, best in 2011″)

… Americans spent more on cars and trucks, and companies built up their stockpiles. But growth in the October-December quarter – and all of last year – was held back by the biggest annual government spending cuts in four decades.

… Spending by government at all levels fell at an annual rate of 4.6 percent in the fourth quarter and 2.1 percent for the year – the biggest decline since 1971.

Sweeping federal defense cuts at the beginning and end of 2011 were a major factor.

6:20 p.m. (“American economy not healthy yet, but it’s healing”)

… Still, overall growth last quarter – and for all of last year – was slowed by the sharpest cuts in annual government spending in four decades. And many people are reluctant to spend more or buy homes, and many employers remain hesitant to hire, even though job growth has strengthened.

… And government spending at all levels fell at an annual rate of 4.6 percent in the fourth quarter and 2.1 percent for the year – the sharpest drop since 1971. Defense cuts at the start and end of the year were a key factor. With Congress aiming to shrink budget deficits, the likelihood of further federal spending cuts could weigh on the economy.

Again, what Crutsinger calls “government spending at all levels” is really “government purchases of goods and services” (plus a small amount of “investment”).

Government purchases of goods and services indeed dropped during the fourth quarter compared to the third, and represented a negative 0.93-point contribution to GDP. National defense made up two-thirds of that reduction.

Today’s reported federal dollar component of GDP was an annualized $1.044 trillion. Total federal spending in the fiscal year ended September 30, 2011 was $3.599 trillion. Federal spending in the first three months of fiscal 2012 was $877 billion (vs. $902 billion during the final quarter of fiscal 2011), which annualizes to $3.508 trillion. The largest element of the $2.5 – $2.6 trillion difference between total spending and the GDP component would be transfer payments of all types (Social Security, Medicare, Medicaid, food stamps, welfare, and so many more).

Governments (federal, state, and local) basically bought less stuff in the fourth quarter than they did in the third. Most of what they bought less of related to national security, which is not a particularly comforting thought. At the federal level, the growth in transfer payments didn’t slow down, meaning that total spending didn’t meaningfully slow down.

If his aim was to be truthful, Crutsinger should have told readers that “governments reduced their purchases of goods and services by the largest percentage in 40 years.” Less descriptively, he could have written that “governments’ component of GDP shrunk by the largest percentage in 40 years.” Instead, either ignorantly or deliberately, he gave readers the impression that all government spending was reduced at a historic rate. It isn’t so. What occurred in connection with government spending other than that which directly relates to GDP wasn’t even relevant to his report.

Cross-posted at NewsBusters.org.


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