August 15, 2012

AP Again Treats Govt. Spending in GDP Report as Same as All Govt. Spending, Falsely Claims Substantial Cuts

There are so many holes in Paul Wiseman’s Wednesday report at the Associated Press on the weakness of the current “recovery” that it would take a term paper to cover all of them. I’ll just concentrate on a repeat error Wiseman made. It is one which AP colleagues Christopher Rugaber (with Wiseman, as demonstrated here) and Martin Crutsinger (as shown here) have also committed. All three gentlemen have been preparing their reports as if “government spending” is the same thing as the government spending and investment component of the nation’s economic output. It’s not.

In his piece about why the Obama “recovery” (as seen here, by Warren Buffet’s requirement that per capita GDP has to return to where it was before the downturn began, we don’t even have the beginnings of a recovery yet) is the worst since World War II, Wiseman had the following to say on the “government spending” topic:

US ECONOMIC RECOVERY IS WEAKEST SINCE WORLD WAR II

Government spending and investment at the federal, state and local levels was 4.5 percent lower in the second quarter than three years earlier.

Three years into previous postwar recoveries, government spending had risen an average 12.5 percent. In the first three years after the 1981-82 recession, during President Ronald Reagan’s first term, the economy got a jolt from a 15 percent increase in government spending and investment.

This time, state and local governments have been slashing spending – and jobs. And since passing President Barack Obama’s $862 billion stimulus package in 2009, a divided Congress has been reluctant to try to help the economy with federal spending programs. Trying to contain the $11.1 trillion federal debt has been a higher priority.

Wiseman never defined “government spending” as “the federal and state/local government components in the GDP report.” Readers will therefore believe that he is referring to all government spending. He isn’t. Additionally, although in context most economically astute readers would know it, he also didn’t make it clear that he was referring to inflation-adjusted government spending.

Wiseman obtained the percentage in the first excerpted paragraph from the second quarter 2012 Gross Domestic Product report (Table 3B, chained 2005 dollars). The trouble is that the federal and state/local government components throughout the GDP report are a very small percentage of overall government spending.

The federal components of GDP for in the second quarter of 2012 and 2009 (expressed in current dollars at Table 3A) were an annualized $1.2102 trillion and $1.1359 trillion, respectively. Total reported U.S. government spending per the Treasury Department will be roughly $3.6 trillion when the current fiscal year ends on September 30, 2012, and was an overstated (for reasons discussed here) $3.520 trillion in fiscal 2009. Thus, only about one-third of federal spending makes it into GDP. One of the largest components of what doesn’t get into GDP consists of transfer payments, examples of which include Social Security, payments to federal retirees, and social welfare programs. Out-of-pocket federal spending outside of TARP has increased by about 5% in the past three years, while Uncle Sam’s contribution to GDP has increased by about 6.5% (gain, as noted earlier, in current dollars). That’s roughly zero growth in real terms (after explosive growth during the preceding two years).

The state and local GDP components in the second quarter of 2012 and 2009 were an annualized $1.8382 trillion and $1.8219 trillion, respectively, while a chart found at the Cato Institute shows the grand total of all state spending rising to $2.290 trillion in the middle of last year from $2.196 trillion in calendar 2009. Roughly 18% of state and local spending isn’t in GDP. State and local spending is down only slightly in real terms.

Overall, all government out-of-pocket spending has only dropped very slightly in real terms. It’s far less than the 4.5% by which their real GDP component has dropped. Unfortunately, thanks to Wiseman, most readers will incorrectly believe that government spending in all its forms has declined by that amount. I guess that’s supposed to lead readers to believe governments should be spending more, not less.

As to Wiseman’s attempted point about government spending increases during the early years of the Reagan administration, those increases, largely for defense went into GDP and to a limited extent helped the economy grow. Much of President Obama’s stimulus went towards transfer payments and other items which did nothing for GDP, and gave the economy very little in the way of a meaningful boost.

Cross-posted at NewsBusters.org.

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