Obama: ‘We can’t just cut our way to prosperity’

By Robert Romano — Why does the Bureau of Economic Analysis (BEA) include government spending as a component of the Gross Domestic Product (GDP)?

The answer may be that’s how economist Simon Kuznets, who developed the measure, saw things. In his 1934 report “Report on National Income” to Congress, he acknowledged there might be skepticism over its inclusion in the measure.

“There may be some doubt as to the propriety of classifying government (Federal, State, county and city) as a branch of the country’s economic system, and of treating its activity as an economic pursuit,” Kuznets wrote, adding, “the motive of immediate profit, which characterizes private industry, is conspicuously absent from the activity of the government.”

On the other hand, he wrote, “purely governmental functions are of real value in the economic life of the nation, and that they give rise to income which should be taken into account.”

Essentially, because the government spends money, generating income for government employees and contractors, which results in further consumption, it affects the economy. As such, Kuznets included it as a component of the GDP.

Simple enough. Fast forward eighty years, however, and it appears this inclusion by Kuznets has had some unintended consequences.

Namely, it has led to the development of the view, largely in the Keynesian school of economics, that government spending, because it nominally boosts GDP when it is increased, should therefore always be increased.

One such advocate currently resides in the White House: Barack Obama.

In a Feb. 5 press briefing advocating for Congress to again delay implementation of some $53.8 billion of sequestration cuts to outlays due on March 1, Obama suggested that “we can’t just cut our way to prosperity.”

Obama continued, “Deep, indiscriminate cuts to things like education and training, energy and national security will cost us jobs, and it will slow down our recovery.  It’s not the right thing to do for the economy.”

This followed the White House’s explanation for the 0.1 percent contraction of the economy in the fourth quarter as coming on account of a $40.4 billion overall cut to government spending explained the contraction. On Jan. 30, White House Press Secretary Jay Carney opined, “the GDP number we saw today was driven in part by — in large part by a sharp decrease in defense spending.”

Americans for Limited Government President Bill Wilson acknowledged this in a recent piece, “The Fed can’t print growth,” writing that this type of result “probably advises why government spending should no longer be included in the measurement of growth. How much money the government wastes every quarter really tells us nothing about the health of the private economy anyway.”

Wilson noted that if government spending had been excluded as a component of GDP, in the fourth quarter of 2012 the private sector only grew by a 1.3 percent real rate. “That is nothing to write home about,” he said. In other words, even without the spending cuts, the underlying economy is still very weak.

Underscoring his point on the misleading impact government spending has on GDP, he looked back at the economic impact of decreased government spending after World War II: “GDP contracted by 1.1 percent in 1945, by a whopping 10.9 percent 1946, and then again in 1947 by 0.9 percent. Meanwhile, personal consumption and private investment was increasing substantially after the war ended.”

Wilson is correct. In 1946 alone, even though personal consumption jumped 12.4 percent and private investment 156.4 percent, because bloated government spending dropped by 65.6 percent, the economy “shrank” by 10.9 percent.

“Was the economy contracting, or was spending simply cut?” Wilson asked.

He explained, “The fact is, the war ending and the substantial decrease of government spending were both boons for the global economy, which after the war the economy grew dramatically,” such that “including spending as a component of GDP is a gross distortion of economic reports.”

Adjunct scholar of the Mises Institute Howard Shostak succinctly points to the potential absurdity of using government spending to measure economic welfare, writing, “if a government embarks on the building of a pyramid, which adds absolutely nothing to the well-being of individuals, the GDP framework will regard this as economic growth.”

Shostak makes a fair point. Without distinction, government spending, whether or not it is wasteful, tends to get lumped together with everything else. Moreover, government spending may even be disruptive and economically counterproductive.

Shostak notes that “the building of the pyramid will divert real funding from wealth-generating activities, thereby stifling the production of wealth.”

That certainly appears to have been the experience after World War II. Once resources previously dedicated to the war effort were freed up, the private sector economy grew rapidly.

To that end, Wilson advocated for the government to get out of the way, concluding, “the budget should be balanced, freeing up resources for the private sector. Health, labor, and environmental regulations restricting business expansion ought to be rolled back.  And sound money must be restored, bringing an end to the Fed’s quantitative easing programs.”

Instead, the only thing Obama appears interested in is increasing spending.

Robert Romano is the Senior Editor of Americans for Limited Government.

  • http://www.facebook.com/825sbrd Russ Fowler

    Stop all spending and stop printing more money. Bite the bullet.

  • Marine68

    If we cut all administration salaries and benefits by half, and remove 50% of the Security forces the president uses, reduce Federal Employment accross the board by at least 50%, and close EPA, IRS, Education Dept, Dept.of the Interior, FDA, Social Benefits to Illegals and resident Aliens, cancel Social security Totalization, and Foreign Aid; then close the UN, and all military installations in developed Countries around the World. We should be able to remove the debt and deficits in a few years and return our Country to a prosperity never before achieved.

  • pduffy

    According to this ‘theory’, an infinite amount of government spending would produce infinite wealth and prosperity. Does anybody believe this lie? If government were a net producer of wealth, it would not need to ‘tax’ anybody, but we all know this is not the case. In order to function, government exists as a parasite on the producers. Therefore the more it spends, the more it must sucks, but if it sucks so much that the host dies, it also dies. Therfore government spending is a DRAG on the economy! This fact SHOULD be an obvious scientific conclusion to the most casual observer, but not to the thief who lives from the work of others. This foolish economic theory is nothing more than a justification to rob producers for the benefit of those employed by the goverrnment, and those wishing to live from the teet of the parasite. Get the picture?

  • reggiec

    1. Government does not create wealth.
    2. everyone that works for government, even contractors, are paid with tax dollars.
    3. The taxes they pay on their wages only return a portion of those tax dollars to the government so all the rest of their wages is a direct loss to other tax payers.
    4. That loss to other tax payers removes that amount from the economy for a single purpose; to support government.
    5. Because those tax dollars are used only to support government; something else will not be built, repaired, invested in or some service will not be performed.
    6. Because of 1-5 above; the size and cost of government is inversely proportional to the success of private industry and the overall economy.

  • LittleMoose

    Why not? Just think of what you can do with the 40% of revenue that is currently being used to service the debt.

  • pduffy

    If the government had taxed the population at the rate they spent, there would have been a revolt a long time ago, but they opted to ‘borrow’ the money instead, mainly from foreign nations that hate us, because they knew they could never set the tax rates that high to support their lusts without an uprising. It gave both sides of the isle what they wanted – big spending for the socialist, and low tax rates for the capitalists. This ‘borrowing’ actually created the illusion that government spending helped the economy, and it made much of the population belive the lie. This ‘pushed’ the taxation into the future, which will now require a total confiscation of all wealth to repay (of course with interest), but the people loved it while the borrowing was going on. Living beyond your means for a while seems good, and this artificial increas in the American standard of living turned the government into the ‘god of America’. But as all ponzy schemes eventually fail, so too will the ultimate ponzy scheme of the American government. I don’t think the Chinese people are going to be too happy if Mr. Obama sends them a couple of trillion dollar coins to repay the debt we have racked up. All those Chinese people who skimped and saved are going get nothing. Get the picture? We are in for BIG trouble, and it’s all because of the people, the people, the people, who continually demand more and more government spending. The piper must be paid.

  • http://www.facebook.com/people/Sara-Johansen/1231561660 Sara Johansen

    how about we give it a try!!!!!!

  • http://www.facebook.com/jwatersphd James H Waters Phd

    Mostly nonsense here as usual. Waste is waste no matter where it occurs, but what you consider waste is a matter of opinion. Is it wasteful to issue a passport? Is it wasteful to run a system of courts and law enforcement? Is it wasteful to force a polluter to take responsibility for that behavior and to curtail it? Is it – really! – wasteful to educate our children? Anyone who really thinks all government activities are wasteful can’t be thinking very much. As usual, the Chamber of Commerce, who is behind these articles about “liberty” and “freedom,” seems keen to brand anything that doesn’t allow some businessman to make a profit as “waste.” The other thing to watch out for is the notion that only the rich deserve the services government provides. If the ordinary citizen can’t afford to educate his/her children, tough luck. Buy yourself a school. Want to fish? Buy a piece of land on the river. Need someone’s property for yourself? Start a militia and just take it, like the warlords of old. It’s hard to imagine why this isn’t obvious.

  • http://www.facebook.com/hankster6 Henry Flynn

    What Obama will not say it that “if I cut spending, I won’t be able to bankrupt America, which is part of my agenda”. Knowing that to be true, no one is mentioning that part of his agenda is to bankrupt us along with destroying our defenses. He as already in full progress on destroying our economy. Driving more private businesses out of business in part of that agenda. His mentors have him on track. That’s is why he was elected. He does what he is told to do by his communist mentors! No matter how many rational people tell him what he should be doing, he goes the way of his mentors!!

  • reggiec

    You are correct and all that borrowed money will also have to be paid back with tax dollars confiscated from American tax payers. This will further deplete the finances of Americans and their ability to participate in the free market and further damage the economy. See #s 4 & 5 above.

  • jerry

    And He is supposed to be an intelligent college graduate….How’s that affirmative action working out for us? He never even had a PAPER ROUTE!!

  • sesummers

    It makes sense to include government spending in GDP. What DOESN’T make sense is to include DEFICIT spending in GDP. Money you borrowed shoudn’t be included in the total of money you earned, because presumably, you’re going to have to PAY IT BACK. But in the years where we’re paying it back, we’re certainly not going to deduct the payments from GDP calculations, are we?

  • sesummers

    What’s wasteful is to require $150 worth of overpaid, underproductive labor to issue each passport. (Note: I made that number up – it’s just an example.) What we know from literally MILLIONS of examples is that organizations who try to make a profit from such activities do them FAR more efficiently than government agencies. Imagine how much better our educational system would be if we had multiple private schools competing for students’ vouchers instead of entrenched government bureaucracies staffed by public sector union members who manage to take the income from a classroom of 25 or so students (roughly $200K-$250K) and have it NOT BE ENOUGH to pay the teacher, the rent, utilities, etc.

  • pduffy

    Some of the things you mention are legitimate functions of government, but you must pay to get a passport. Therefore, no ‘taxes’ are needed to support the passport department. The same is true of the postal service, which is mostly funded by actual postage. Government FEES can cover these functions, not taxes. Most of the spending is NOT on these necessary government functions, but on ENTITLEMENTS. Constitutional functions of government may require taxes, such as the defense department, but SOCIALISM and CHARITY, and RETIREMENT, and HEALTH CARE are not functions of government. This is where you fall off the tracks. Robbing one group of Americans to give to another is STEALING. What can’t you understand about this? To give a person ‘health care’ may not seem a waste to you, but the person that got robbed to furnish it may have gone bankrupt. Which is a greater evil? And why do you get to decied this?

  • geeshim

    Look at all of the false and faulty premises here. Tsk, tsk.

  • http://www.facebook.com/richard.todl Richard Todl

    And, we can’t spend our way to prosperity!!!!!!

  • http://www.facebook.com/jerry.reames Jerry Reames

    what an a&& ho–

  • Arizona_Don

    Interesting, four years you were saying we “could” spend our way to prosperity. Perhaps your right maybe we can’t “cut” our way to prosperity but we can “cut” our way to less debt and we should start yesterday!

  • Arizona_Don

    What happens to this debt service if the interest rates go to 10 or 12% or higher like it did under Carter? Where do we get the money to run the government and also service our debt? Just printing money devalues our money and someday we will have to pay that as well. There is no getting out of this hole we have dug for ourselves. Or perhaps we should say Obama has dug for us.

  • Arizona_Don

    There are no words in the English language to describe how much I loathe Barack Obama.

  • Samurai_Sam

    It’s true you can’t cut your way to prosperity but someone ought to inform this idiot that you “can” cut your way out of poverty.

  • http://twitter.com/dchrist81 david christoph

    Obama needs to learn – and statistics need to accurately report – that government spending does NOT contribute to prosperity of a sustainable private sector. Only privately owned profit-seeking enterprises are sustainable because only by seeking profit does an owner of resources have the discipline to understand and control the costs and risks of the inputs and processes upon which prosperity depends. http://mises.org/document/3736/Profit-and-Loss

    but the government’s inflation and GDP statistics do everything possible to hide the truth about the necessity of the private sector and the necessity of seeking an honestly reported profit undisguised by statistical government lies. http://www.youtube.com/watch?v=zPkTItOXuN0

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