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All along, the real danger of the so-called "fiscal cliff" wasn't that U.S. national debt would increase, but instead that it would drop too quickly. Now, the surprise news that the American economy contracted by 0.1 percent in the last quarter of 2012 is providing a case in point. Along with the impact of super storm Sandy, declining exports and shrinking inventories, steeps cuts in federal (especially defense) spending explain much of the shortfall from the consensus forecast of 1.1 percent growth. As it turns out, since the start of the great recession the unprecedented shrinkage of the U.S. public sector has hampered economic growth and likely added a full point to the unemployment rate.

As Think Progress noted Wednesday, "The 0.1 percent contraction is almost entirely attributable to cuts in government spending." The Bureau of Labor Statistics (BLS) explained:

Real federal government consumption expenditures and gross investment decreased 15.0 percent in the fourth quarter, in contrast to an increase of 9.5 percent in the third. National defense decreased 22.2 percent, in contrast to an increase of 12.9 percent. Nondefense increased 1.4 percent, compared with an increase of 3.0 percent. Real state and local government consumption expenditures and gross investment decreased 0.7 percent, in contrast to an increase of 0.3 percent.
That development came just one day after the Bipartisan Policy Center warned that the automatic budget sequester now scheduled to kick in on March 1 could cost the U.S. one million jobs in 2013. As Jared Bernstein lamented Wednesday:
The role of diminished government spending--austerity at time when we need a fiscal push--is a useful reminder that it's not nature that has us stuck in this slog, it's policy.
Very bad policy, that is.

Continue reading below the fold.

All told, the public sector at all levels of government has shed over 600,000 employees since mid-2009. (The figure was 89,000 over the last three months of 2012, representing one government job for five gained in the private sector.) The triple whammy of declining state and local tax revenues (which only returned to 2008 levels last year), draconian budget cuts and the drying up of federal stimulus funds have led to a record decline in government jobs.

That, according to some of the leading voices of the conservative movement, is a good thing. In the fall of 2011, columnist George Will exulted that the public sector "happily shrank" and cheered "that's good." For his part, Senate Minority Leader Mitch McConnell (R-KY) called those layoffs a "local problem." In June, Liz Cheney mocked President Obama for "actually trying to undo even the good that is being done at the state level."

Unfortunately for the American economy, what's been happening to government workers at the state and local level is far from "good."

In April, the Economic Policy Institute (EPI) showed how bad with the chart above. Noting that the private sector had gained 2.8 million jobs while federal, state and local governments shed 584,000 just since June 2009, EPI concluded that the public sector job losses constituted "an unprecedented drag on the recovery":

The current recovery is the only one that has seen public-sector losses over its first 31 months...

If public-sector employment had grown since June 2009 by the average amount it grew in the three previous recoveries (2.8 percent) instead of shrinking by 2.5 percent, there would be 1.2 million more public-sector jobs in the U.S. economy today. In addition, these extra public-sector jobs would have helped preserve about 500,000 private-sector jobs.

As the New York Times' Floyd Norris explained in "the Incredible Shrinking U.S. Government."
For the first time in 40 years, the government sector of the American economy has shrunk during the first three years of a presidential administration.

Spending by the federal government, adjusted for inflation, has risen at a slow rate under President Obama. But that increase has been more than offset by a fall in spending by state and local governments, which have been squeezed by weak tax receipts.

In the first quarter of this year, the real gross domestic product for the government -- including state and local governments as well as federal -- was 2 percent lower than it was three years earlier, when Barack Obama took office in early 2009.

All told, the unemployment rate without the hemorrhaging of public sector jobs could be a full point lower. "We're talking big numbers here. If government employment under Mr. Obama had grown at Reagan-era rates," Paul Krugman lamented in March, "1.3 million more Americans would be working as schoolteachers, firefighters, police officers, etc., than are currently employed in such jobs."

Yet when President Obama rolled out his $447 billion American Jobs Act including new assistance to state and local governments in the fall of 2011, Republicans made it clear why they opposed a bill former McCain economic adviser Mark Zandi forecast that could create up to 1.9 million jobs and add two points to U.S. GDP:

"Obama is on the ropes; why do we appear ready to hand him a win?"
In response to the GOP filibuster, a frustrated Obama could only ask:
"Are they against putting teachers and police officers and firefighters back on the job? Are they against hiring construction workers to rebuild our roads and bridges and schools?"
In a word, yes. And unless the looming sequester is delayed or cancelled altogether (something neither party sees as likely), the U.S. economy will take another body blow. And not just from defense cuts; "non-defense, discretionary" spending will be reduced to the lowest level in decades, further pummeling already hard-hit state and local governments. For Americans looking at a sluggish job market, the result will be all pain, no gain.

UPDATE: The Washington Post and New York Times have more background on the steep drop in defense spending that shaved more than a point off of GDP growth.  Most of it is explained by cyclical, quarter-to-quarter patterns in Pentagon spending, which typically jumps in the last quarter of the fiscal year (which ends in September) and drops in the first quarter of the next (October to December).  Whether more spending was cut in anticipation of the sequester is unclear.  

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Comment Preferences

  •  Hooverism. (2+ / 0-)
    Recommended by:
    ssgbryan, Woody
    •  Sure ain't no Franklin Roosevelt (1+ / 0-)
      Recommended by:

      If the Repubs have their way, you and your spouse will both be laid off.

      The Democrats are more moderate and they will be satisfied if your spouse is sacked while you keep a job and try to support your family on one paycheck.

      There is no political leadership talking about adding government jobs.

      Plenty of economists are talking about the urgent need to add jobs, but hey, what do they know?

  •  The drop in govt spending (0+ / 0-)

    was in the military. Who doesn't think that a drop in military spending is a good thing?

    •  Spending cuts affect *people* (1+ / 0-)
      Recommended by:

      And those effects spiral.  

      Cut defense dollars?  That means lots of layoffs in defense and high-tech industries, particularly along the West Coast.  That means laid-off workers now forced to forgo discretionary spending of all types — maybe put off the purchase of that new car. So the drop ripples out to the automotive sector.  They put off doctor visits.  That impacts the doctor's bottom line, too.  

      The notion that you can cut government spending — on anything — without forcing suffering on the part of the public, is just unbelievably naive.  The bottom line is this:  cutting spending — in any sector of the economy — during a time of declining wages, declining standard of living and negative job growth, is simply foolish.  We should have already learned that from the recent experience in the UK.  

      Shirley Chisholm was right. Our Republic is in deep trouble.

      by Big River Bandido on Wed Jan 30, 2013 at 01:31:53 PM PST

      [ Parent ]

    •  If we took those cuts to military, which I support (3+ / 0-)
      Recommended by:
      Roger Fox, Woody, Calamity Jean

      and reinvested them in a jobs program to build things that don't go "bang", then yeah, that would be great.

    •  On a personal level I don't (1+ / 0-)
      Recommended by:

      I lost my job because of this.

  •  Focus on 2014 (1+ / 0-)
    Recommended by:

    That's all I can say.

    We need to get rid of as many in the House GOP as humanly possible in 2014.  I can't emphasize how important the 2014 midterm elections will be for the U.S. and well being.

    And we should start by beating the entire Tea Party Caucus.

    •  If the economy continues (1+ / 0-)
      Recommended by:

      If things get worse because of the sequester, because of the massive cuts in government jobs, and because of the betrayal of the party's heritage of Social Security and Medicare, in 2014 the Democrats will be punished at the polls.

      Upthread someone mentioned Herbert Hoover. As the Great Depression was beginning, accelerated by the Great Crash in 1929, the Republicans lost a lot of seats in the midterm election of 1930. Then in 1932 they lost over 100 seats.

      History does not repeat. Obama was not in office when this Lesser Depression began; the voters still blame Bush.

      But history does rhyme. If Obama cannot get the economy growing -- and he can't do it by slashing government spending and jobs -- he and the Democrats will be punished by the voters next chance they get.

      We could lose 100 seats. And deserve it.

  •  25 to 30 million people (1+ / 0-)
    Recommended by:

    would like a full time year round job.

    Nice diary, a pie slice of the job issue. GDP is not self sustaining at this level. Income disparity is so bad - demand is low and dropping. This lowers GDP.

    FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

    by Roger Fox on Wed Jan 30, 2013 at 05:29:51 PM PST

    •  not necessarily, in an environment where GDP (0+ / 0-)

      includes how many times my husband and I write checks back and forth to each other.

      GDP is a crappy measure of the real economy.  If it were a good measure, it would have been awful  a long time ago.

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