Revisions to the fourth-quarter gross domestic product (GDP) were as disappointing as the original report. New data nudged growth into positive territory, with the Commerce Department now reporting that the nation’s economy expanded by 0.1 percent last quarter.
Government spending continues to be a drag on the economy; simply because that is the way the GDP is calculated.
In 2009, the government rushed through an $830 billion stimulus bill that, according to some, saved the world from a second Great Depression. Rather than debating the need for so much government spending, the formula for GDP shows that economic decline is expected after so much spending.
GDP is the total of all private and government spending. A decrease in government spending will decrease GDP because that is the way the formula is designed.
Keynes believe government spending should be increased to smooth the rough spots, as it was in 2009. But that money must be spent effectively in order to actually stimulate growth. When executed correctly, government spending binges should be followed by decreases in spending that are offset by private-sector spending.
The fact that government spending cuts are having a negative impact on GDP should be expected. The fact that private-sector spending has failed to increase is the real problem and is an indication that the stimulus failed to do what advocates promised it would do.
The only solution now is to continue reducing the role of government spending and regulation to unleash private-sector creativity and spending.
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