Internet poses two problems. One, you have to write really fast. Second, the opinions reach a worldwide audience. And that’s what happened on January 31. Headlines pointed out that U.S. growth had fallen into negative territory due to the fiscal cliff effects. And, indeed, the GDP decreased by a 0.1% in the fourth quarter.
Were the cuts so dire that they were making the economy collapse… even before they started? Apparently they were. Given that 50% of the spending cuts would concentrate on defense, which in 2013 will represent more than 20% of the budget, public spending in that entry was set to fall by 22.2%. Excluding the Pentagon, however, the U.S. economy grew by about 1%, only slightly lower than market expectations. And taking out of the equation inventory reduction (which in practice means that there will be more production in the future, because there are fewer unsold goods), GDP was about the expected 1.2%.
But facts are facts, and in this case they showed something with little precedent in history: fear of spending cuts had made the U.S. defense officials cut spending even before they were forced to do so. A good example of commendable public spirit, even if a bit exaggerated. As we mentioned before, defense spending fell by 22.2% in the fourth quarter, according to the figures of GDP. It would be a case of ‘advance tax multiplier’. A whole new development in the theory of rational expectations.
That’s how Alan Krueger saw it. The top economic adviser to Barack Obama, President of the Council of Economic Advisers, stated in his blog that “a possible explanation for the sharp drop in federal defense spending is the uncertainty regarding automatic spending cuts that were scheduled for January and now they are for March 1.”
Do these figures make sense? They don’t, and neither do the explanations. Many headlines about the U.S. GDP were due to ignorance, and Krueger’s post in the desire to politically manipulate a statistic. A statistic that is very prone to be manipulated, we must say. The point is that the Bureau of Economic Analysis (BEA) of the Department of Commerce of the United States who calculates the GDP, measures it on an annualized basis. That is, quarterly change in GDP is projected for the whole year. As a result, a 5.3% quarterly cut in defense spending becomes an annualized 22.2%. Cutting in Defense was actually due to factors that have nothing to do with fiscal adjustment but the withdrawal from Afghanistan.
So there is more political show than debate in all the talk about fiscal adjustment and the cliff, now postponed to March 1. A circus that fits well with headlines saying that the U.S. will fall into the fiscal cliff on March 1. And more even so because, on March 27, budget money allocations will dry out, which will probably end in a temporary closure of public administration while Democrats and Republicans are blaming each other over the budget.
All this political fuss and buzz only diverts attention from the real situation in the U.S.: a slow recovery from a financial crisis of historic proportions and a fiscal consolidation that is actually doing very well. The deficit was 10% of GDP in 2009, and in this fiscal year, which ends in September, will be below 6%. Meanwhile, GDP grew by 1.8% in 2011, 2.1% in 2012 and is poised this year and next to continue in the same range. Thus, the U.S. is still limping towards a proper recovery.