jonathan chait

Honey, I Shrunk the Economy

U.S. Rep. Paul Ryan (R-WI) listens during the vice presidential debate at Centre College October 11, 2012 in Danville, Kentucky. This is the second of four debates during the presidential election season and the only debate between the vice presidential candidates before the closely-contested election November 6.
Photo: Chip Somodevilla/Getty Images

After years of slowly crawling out of the cratered economy, economic growth suddenly shrank at a 0.1 percent annual rate. The good news (Joe Weisenthal offers a sunny take) is that the contraction is sort of a fluke — consumers and businesses are spending away, and a decline in government spending is entirely accountable for the contraction. (Defense spending dropped 22 percent over the quarter.)

The bad news is that it’s not really a fluke. That is to say, the fundamentals of the economy are strong, and could be enjoying a strong recovery if not for easily corrected policy errors, but we probably won’t correct those policy errors. The stimulus at the outset of the Obama presidency injected a huge shot of demand into the economy, but government has been shrinking steadily since.

What’s more, we’re set to implement another huge round of spending cuts within a couple of months. The budget “sequestration” will lop more than a trillion dollars of spending cuts out of the economy, creating similar effects as we saw this last quarter. The Obama administration had hoped the threat of these cuts, half of which come out of defense, would force Republicans to compromise on some kind of long-term deal that would eliminate all the short-term austerity and replace it with gradual, long-term deficit reduction.

But that seems unlikely to happen. Obama wants the long-term plan to include a mix of higher revenue through tax reform with cuts to Medicare and Social Security. Republicans insist the deal must consist entirely of cuts to social programs, and any higher revenue is unacceptable. The GOP’s stated plan is to just implement the sequestration cuts.

What’s more, Republicans remain publicly committed to the notion that this will help and not harm the economy. Appearing on Meet the Press last Sunday, Paul Ryan was asked whether deficit spending had helped prevent a depression, as the vast majority of economists believe. “Well, we can debate the efficacy of Keynesian economics or not,” he said, “and I think that it’s pretty clear that it doesn’t work.”

So, the positive take on the economy is sort of like saying the Knicks were winning by twenty points last night and they only lost because their assistant coach took over and decided to play the rest of the game with just three players. That sounds comforting, except the same assistant coach is still there, and he keeps saying his play-three-guys strategy will work.

Honey, I Shrunk the Economy