By Mark Whitehouse
As the U.S. prepares for a new round of congressional elections on Tuesday, it’s worth keeping in mind the huge influence lawmakers can have over the country’s economic well-being. Consider, for example, the role of budgeting decisions in recoveries.
Typically, government spending and investment help the economy get out of the doldrums. During the first 51 months of the three previous economic expansions (1982, 1991 and 2001), the government contributed somewhere between 10 percent and 20 percent of growth. In this recovery, which began in 2009, such spending has been notable for its near-absence: The latest data from the Commerce Department suggest that it has accounted for less than 4 percent of nominal growth since the economy hit bottom in mid-2009.In inflation-adjusted terms, the government has actually subtracted from growth.
How did the government get to be such a drag? Soon after Congress approved a stimulus package worth more than $800 billion in 2009, the rise of the Tea Party movement prompted legislators to focus on reducing the federal budget deficit. They did so in the most damaging possible way, by immediately reducing discretionary spending rather than addressing the longer-term Medicare and Social Security costs that genuinely threaten the government’s finances. The cuts in federal spending added to declines in state and local spending as municipalities grappled with falling tax revenues and their own high pension costs.
Such austerity, though it was mild compared with what some European countries have endured, has a bigger impact than meets the eye. The International Monetary Fund estimates that when the economy is running below potential — and assuming the government has the capacity to borrow — an added dollar in government investment can ultimately boost economic activity by more than $1.50. A subtracted dollar has a similarly outsized impact, reinforcing consumers’ gloom and contributing to the kind of long-term unemployment that erodes peoples’ skills and permanently impairs the economy’s productive capacity.
The editors of Bloomberg View have expressed hope that if Republicans gain control of both chambers of Congress, they might see the wisdom of investing in an upgrade of the country’s crumbling infrastructure — a project that, done right, could improve U.S. finances by increasing economic output more than debt. With interest rates at extreme lows and prime-age employment still millions of jobs below normal, it’s certainly not too late.
To contact the writer of this article: Mark Whitehouse at mwhitehouse1@bloomberg.net.
To contact the editor responsible for this article: Max Berley at mberley@bloomberg.net.- EIN News
