On Wednesday, July 31, the Bureau of Economic Analysis (BEA) released multiyear revisions to gross domestic product (GDP), the broadest measure of the economy’s performance. The key takeaway is that the revised GDP series shows an even sharper deceleration in growth over the past year, to rates that are incapable of generating a full recovery (note that there’s a critical distinction between a growing versus recovering economy).
Austerity is to blame.
The headline number accompanying last Wednesday’s report was that the economy expanded at an annualized rate of 1.7 percent in real terms (i.e., adjusted for inflation) in the second quarter of 2013, up from 1.1 percent in the first quarter. These annualized quarterly reading present only volatile and incomplete snapshots of our economic health; that said, both of those growth rates well shy of what’s needed to ameliorate the jobs crisis.
Stepping back, a better measure of trend economic performance is year-over-year growth. In the year running up to the second quarter of 2013, the economy grew only 1.4 percent in real terms. This is poses a serious problem for policymakers; as a rule of thumb, real GDP growth must exceed a range of roughly 2 percent to 2.5 percent annually in order to make meaningful progress toward full economic recovery.
As I explained in this blog post (based on the pre-revision data), trend growth had recently slowed below this range—a recipe for stagnation and backwards progress away from recovery. The story has changed somewhat in light of the data revisions. The good news is that the economy has made slightly more progress toward recovery since economic growth resumed in mid-2009 than we had previously understood, with average annual real GDP growth rates eking up from 2.1 percent to 2.2 percent. And the economic contraction during the recession was slightly smaller than we had previously understood, as the figure below depicts. (For wonkier overviews of BEA’s methodological adjustments driving the revisions, see this piece from Josh Bivens of the Economic Policy Institute and this Bloomberg article.)
Figure 1
But, while GDP levels are up, the trajectory for GDP has worsened, and the recent austerity-induced deceleration in economic growth looks much sharper than previously understood. (The story with levels is also complicated by the revised measurements of research and development, and aren’t as positive on net as at first blush—Dean Baker of the Center for Economic and Policy Research has a good explanation.)
There is no comparable pre-revision comparison for growth in the second quarter, but the revised data show real GDP growing 1.3 percent in the year to the first quarter of 2013, down from a 1.8 percent reading from the old data. Moreover, the new data show real GDP growth decelerating—in just half a year’s time—from a higher 3.1 percent in the year to the third quarter of 2012, compared with 2.6 percent reading from the old data, as depicted in the figure below.
So, while the good news is that a year ago, we were in better shape than we thought, the bad news is that, thanks to austerity, the recent deceleration in growth and the present economic trajectory are worse than we had understood.
Figure 2
Critically, this more marked deceleration of growth in the year to the third quarter of 2012 coincides with a nontrivial increase in federal government austerity. Federal spending is set by fiscal years, which start one quarter earlier than calendar years; so the economy grew 3.1 percent in fiscal year 2012. Meanwhile, pre-sequestration discretionary spending cuts from the Budget Control Act of 2011 (i.e., the debt ceiling deal) and preceding cuts negotiated over continuing resolutions ramped up from about $57 billion in reduced outlays for fiscal 2012 to $80 billion in fiscal 2013. These cuts will likely depress GDP by $110 billion (0.7 percent of GDP) in fiscal 2013, up from $80 billion (0.5 percent of GDP) in fiscal 2012.
Congress also imprudently reduced the maximum benefit of emergency unemployment benefits from 99 weeks to 73 weeks starting in the third quarter of 2012, taking about $9 billion (annualized) out of the economy and likely shaving another 0.1 percentage points off of growth in fiscal 2013, relative to fiscal 2012.
And this is before direct effects of sequestration cuts even enter the picture.
While it’s not an apples-to-apples comparison with the drags cited above, note that the revised GDP data show falling federal consumption and investment expenditures shaving a sizeable 0.7 percentage points off of real GDP growth in the first quarter of 2013. There was an even bigger federal fiscal drag of 1.2 percentage points from growth in the fourth quarter of 2012, as the 2013 fiscal year started. These drags are almost entirely driven by falling defense expenditures—the caveat being that this is a particularly volatile component of GDP—but a big chunk of this surely reflects the Department of Defense planning for sequestration. (Note: Reduced unemployment benefits are counted as transfer payments and would reduce consumption, not direct government purchases measured here.)
In the January lame duck budget deal, Congress delayed sequestration’s implementation until March 2013, and the real economic drag will gradually escalate as reduced authority for agencies to spend money translates to reduced outlays and budgeting choices become more painful. Meanwhile, the austerity from the underlying discretionary spending cuts will also continue to escalate. And, as the GDP revisions underscore, this is all from a baseline of unacceptable growth rates.
So, compared with our prior beliefs, it now looks like the economy was gradually gaining more momentum in fiscal 2012—to growth rates sufficient to eventual generate a full recovery—and then austerity squashed growth to recovery-less rates, with annualized real GDP growth averaging just slightly under 1.0 percent in the first three quarters of fiscal 2013.
Looking at the second figure, it’s worth noting the spike to a recovery-high 3.3 percent real GDP growth in the year to the first quarter of 2012 is somewhat misleading in the sense that it’s benchmark for comparison (i.e., the first quarter of 2011) was revised from a flat-lined economy to an economy contracting at a 1.3 percent annualized rate—the only “dip” since the recession ended. But that contraction mostly suggests that the drawdown of federal Recovery Act stimulus (and ad hoc extensions enacted by the 111th Congress) at the end of 2010 was even sharper than previously understood; indeed falling direct government spending reduced growth by 0.9 percentage points in the first quarter of 2011. The economy would have grown 0.3 percent that quarter without falling federal state, and local government spending, and even more without falling transfer payments.
This last point also suggests that the Obama administration was prudent in delaying its policy priority of ending the upper-income Bush tax cuts in exchange for securing the payroll tax cut, expanded refundable tax credits, and extended unemployment benefits for 2011 and 2012—which Josh Bivens and I estimated were collectively adding about 1.4 percent to GDP in each year. Without this fiscal support, a two-quarter contraction—a crude proxy for recessions used in most other advanced economies—now seems quite likely in 20/20 hindsight.
The bottom line is that fiscal support works when it’s tried, whereas austerity wreaks havoc on depressed economies. And in the current economic context, there is no credible argument against deficit-financed stimulus.
A halfway sane Congress would heed these lessons as soon as they return from recess; immediately repealing the imprudent sequestration cuts would be the no-brainer first policy step. Instead, a full meltdown in governance—entirely driven by the GOP—could hardly come at a worse time than in the midst of this depression that’s worsening, thanks to the egregious fiscal policy screw-ups demanded by the Right.
The Austerity Trap: GDP Revisions Show Sharper Deceleration in Growth
On Wednesday, July 31, the Bureau of Economic Analysis (BEA) released multiyear revisions to gross domestic product (GDP), the broadest measure of the economy’s performance. The key takeaway is that the revised GDP series shows an even sharper deceleration in growth over the past year, to rates that are incapable of generating a full recovery (note that there’s a critical distinction between a growing versus recovering economy).
Austerity is to blame.
The headline number accompanying last Wednesday’s report was that the economy expanded at an annualized rate of 1.7 percent in real terms (i.e., adjusted for inflation) in the second quarter of 2013, up from 1.1 percent in the first quarter. These annualized quarterly reading present only volatile and incomplete snapshots of our economic health; that said, both of those growth rates well shy of what’s needed to ameliorate the jobs crisis.
Stepping back, a better measure of trend economic performance is year-over-year growth. In the year running up to the second quarter of 2013, the economy grew only 1.4 percent in real terms. This is poses a serious problem for policymakers; as a rule of thumb, real GDP growth must exceed a range of roughly 2 percent to 2.5 percent annually in order to make meaningful progress toward full economic recovery.
As I explained in this blog post (based on the pre-revision data), trend growth had recently slowed below this range—a recipe for stagnation and backwards progress away from recovery. The story has changed somewhat in light of the data revisions. The good news is that the economy has made slightly more progress toward recovery since economic growth resumed in mid-2009 than we had previously understood, with average annual real GDP growth rates eking up from 2.1 percent to 2.2 percent. And the economic contraction during the recession was slightly smaller than we had previously understood, as the figure below depicts. (For wonkier overviews of BEA’s methodological adjustments driving the revisions, see this piece from Josh Bivens of the Economic Policy Institute and this Bloomberg article.)
Figure 1
But, while GDP levels are up, the trajectory for GDP has worsened, and the recent austerity-induced deceleration in economic growth looks much sharper than previously understood. (The story with levels is also complicated by the revised measurements of research and development, and aren’t as positive on net as at first blush—Dean Baker of the Center for Economic and Policy Research has a good explanation.)
There is no comparable pre-revision comparison for growth in the second quarter, but the revised data show real GDP growing 1.3 percent in the year to the first quarter of 2013, down from a 1.8 percent reading from the old data. Moreover, the new data show real GDP growth decelerating—in just half a year’s time—from a higher 3.1 percent in the year to the third quarter of 2012, compared with 2.6 percent reading from the old data, as depicted in the figure below.
So, while the good news is that a year ago, we were in better shape than we thought, the bad news is that, thanks to austerity, the recent deceleration in growth and the present economic trajectory are worse than we had understood.
Figure 2
Critically, this more marked deceleration of growth in the year to the third quarter of 2012 coincides with a nontrivial increase in federal government austerity. Federal spending is set by fiscal years, which start one quarter earlier than calendar years; so the economy grew 3.1 percent in fiscal year 2012. Meanwhile, pre-sequestration discretionary spending cuts from the Budget Control Act of 2011 (i.e., the debt ceiling deal) and preceding cuts negotiated over continuing resolutions ramped up from about $57 billion in reduced outlays for fiscal 2012 to $80 billion in fiscal 2013. These cuts will likely depress GDP by $110 billion (0.7 percent of GDP) in fiscal 2013, up from $80 billion (0.5 percent of GDP) in fiscal 2012.
Congress also imprudently reduced the maximum benefit of emergency unemployment benefits from 99 weeks to 73 weeks starting in the third quarter of 2012, taking about $9 billion (annualized) out of the economy and likely shaving another 0.1 percentage points off of growth in fiscal 2013, relative to fiscal 2012.
And this is before direct effects of sequestration cuts even enter the picture.
While it’s not an apples-to-apples comparison with the drags cited above, note that the revised GDP data show falling federal consumption and investment expenditures shaving a sizeable 0.7 percentage points off of real GDP growth in the first quarter of 2013. There was an even bigger federal fiscal drag of 1.2 percentage points from growth in the fourth quarter of 2012, as the 2013 fiscal year started. These drags are almost entirely driven by falling defense expenditures—the caveat being that this is a particularly volatile component of GDP—but a big chunk of this surely reflects the Department of Defense planning for sequestration. (Note: Reduced unemployment benefits are counted as transfer payments and would reduce consumption, not direct government purchases measured here.)
In the January lame duck budget deal, Congress delayed sequestration’s implementation until March 2013, and the real economic drag will gradually escalate as reduced authority for agencies to spend money translates to reduced outlays and budgeting choices become more painful. Meanwhile, the austerity from the underlying discretionary spending cuts will also continue to escalate. And, as the GDP revisions underscore, this is all from a baseline of unacceptable growth rates.
So, compared with our prior beliefs, it now looks like the economy was gradually gaining more momentum in fiscal 2012—to growth rates sufficient to eventual generate a full recovery—and then austerity squashed growth to recovery-less rates, with annualized real GDP growth averaging just slightly under 1.0 percent in the first three quarters of fiscal 2013.
Looking at the second figure, it’s worth noting the spike to a recovery-high 3.3 percent real GDP growth in the year to the first quarter of 2012 is somewhat misleading in the sense that it’s benchmark for comparison (i.e., the first quarter of 2011) was revised from a flat-lined economy to an economy contracting at a 1.3 percent annualized rate—the only “dip” since the recession ended. But that contraction mostly suggests that the drawdown of federal Recovery Act stimulus (and ad hoc extensions enacted by the 111th Congress) at the end of 2010 was even sharper than previously understood; indeed falling direct government spending reduced growth by 0.9 percentage points in the first quarter of 2011. The economy would have grown 0.3 percent that quarter without falling federal state, and local government spending, and even more without falling transfer payments.
This last point also suggests that the Obama administration was prudent in delaying its policy priority of ending the upper-income Bush tax cuts in exchange for securing the payroll tax cut, expanded refundable tax credits, and extended unemployment benefits for 2011 and 2012—which Josh Bivens and I estimated were collectively adding about 1.4 percent to GDP in each year. Without this fiscal support, a two-quarter contraction—a crude proxy for recessions used in most other advanced economies—now seems quite likely in 20/20 hindsight.
The bottom line is that fiscal support works when it’s tried, whereas austerity wreaks havoc on depressed economies. And in the current economic context, there is no credible argument against deficit-financed stimulus.
A halfway sane Congress would heed these lessons as soon as they return from recess; immediately repealing the imprudent sequestration cuts would be the no-brainer first policy step. Instead, a full meltdown in governance—entirely driven by the GOP—could hardly come at a worse time than in the midst of this depression that’s worsening, thanks to the egregious fiscal policy screw-ups demanded by the Right.