The Latest Economic Numbers: GDP Decoupled from Government Spending

Cato at Liberty
December 7, 2020 Topic: economy Region: Americas Blog Brand: The Reboot Tags: GDPGovernment SpendingStimulusDeficit SpendingPandemic

The Latest Economic Numbers: GDP Decoupled from Government Spending

There is more to growth than a government gas pedal.

The Bureau of Economic Analysis issued revised national income accounts today, and the figures shed light on whether more government stimulus makes sense. Many economists, pundits, and policymakers claim that Congress needs to pass another large spending bill to sustain growth. The idea is that the economy is a car and spending by the U.S. Treasury and the Fed is the gas pedal.

However, the new economic data suggest that there is more to growth than a government gas pedal.

The chart above shows the quarter‐​to‐​quarter change in nominal or current‐​dollar GDP and total federal, state, and local government spending over recent quarters. GDP is from Table 1.1.5 and government spending is from Table 3.1.

In the second quarter, GDP fell 9.5 percent while government spending rose 45.7 percent. In the third quarter, GDP shot back up 8.4 percent even as government spending fell 11.3 percent. Unemployment benefits and other government transfers are falling, state and local government employment is down, but the economy is in robust recovery.

It is true that government spending in the third quarter was still at an elevated level. But the data does suggest that as we shrink government spending, the economy will continue to expand. The economy is not a car that needs government fuel, but an organism that adapts, improves, and grows automatically when the government leaves it alone.

This article first appeared on Cato at Liberty, a publication of the Cato Institute.

Image courtesy of Cato at Liberty.