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Posted at 9:40 AM ET, 02/25/2011

Who is holding the economy back?

By Ezra Klein

gdogrowthqa10.jpg

Grim GDP news today: We had thought that the GDP grew in the fourth quarter of 2010 by 3.2 percent. We were wrong. According to the revised data released today by the Commerce Department, growth was closer to 2.8 percent. As you can see on the graph above, that's back in "normal" territory. But normal territory isn't good enough after a deep recession. We need better than normal. Much better than normal. And we almost had it. But for two factors, growth would've been at or above seven percent.

So, who's holding us back? First, the government. But not in the way you might think. The problem isn't that we're spending too much but that, in an effort to cut deficits, we -- particularly state and local governments -- are spending too little. The federal government's spending dropped by 0.2 percent, but state and local spending dropped by 2.4 percent. The gross domestic product is essentially a measure of people buying and investing in things. When the government cuts back on its purchases and investments, it's the same as a substantial portion of the population cutting back on its investments and purchases.

The other major headwind was private inventories. "Private businesses increased inventories $7.1 billion in the fourth quarter, following increases of $121.4 billion in the third quarter," the Commerce report said. That's bad for this GDP number. How bad? If you remove the private inventory data, we would have grown at almost seven percent last quarter, and everyone would be celebrating.

But perhaps we'll be celebrating soon. Consumer spending was strong, and so were exports. Businesses are going to have to add to their inventories going forward. If the data that's healthy in this report stays healthy, if the government can avoid premature austerity measures, and if businesses begin adding to their inventories, the next report should look pretty good. But that's a lot of ifs. And watching the states slash their budgets and Congress talk about how much it can cut during the remainder of 2011, it seems certain that government spending cuts, at least, will continue to be a drag on the economy through the rest of the year.

By Ezra Klein  | February 25, 2011; 9:40 AM ET
Categories:  Economy  
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Comments

You should also note that larger businesses have decided to take longer to pay their bills, despite having the cash to do so, thereby depriving small businesses of cash they need to add jobs.

http://www.washingtonmonthly.com/features/2011/1101.leonard.html

Posted by: y2josh_us | February 25, 2011 10:07 AM | Report abuse

"The problem isn't that we're spending too much but that, in an effort to cut deficits, we -- particularly state and local governments -- are spending too little"

Hallelujah! Almost. It is the Federal Government that is not revenue constrained as the issuer of currency. State and local govts need to balance their budgets as currency users. The Federal Government is the only one able to step in and fill the demand gap. But we're so worried about government deficits (which is just non-government surplus) that we shoot ourselves int he foot.
Ezra, you're moving closer to MMT, great!

Posted by: pdrub | February 25, 2011 10:09 AM | Report abuse

I really don't think seigneurage is the answer.

My understanding is that capacity for growth is completely there, but that it's the absence of demand that is holding back growth. I don't know what percentage of total spending on a quarterly basis is represented by the "discretionary" spending portion of the federal budget, and I don't know how large or small a percentage swing in spending it takes to cause or eliminate an economic downturn. These are things that would be interesting to know.

One upshot to this whole policy debate, for me at least, is coming to the realization that social security, for all intents and purposes, is kind of like constant economic stimulus, since it's reasonable efficient in administrative costs and channels almost all of the funds collected almost immediately back into spending (if skewed perhaps a little more toward the purchase of Depends instead of Huggies), since its recipients tend to be those who don't save much of their income.

Posted by: arm3 | February 25, 2011 10:20 AM | Report abuse

I just don't understand the fetishization of spending cuts. Yes, we have $14 in debt now, and that's higher than optimal for the economy we have now. Yes, we have a long term budget problem driven by healthcare costs, and that needs to be addressed at some point. But even if those are true, cuts to non-security discretionary spending won't make a dent in either.

Furthermore, what would supposedly happen in 2011 if we made no cuts? Will interest rates skyrocket, despite the fact that they haven't and don't look like they will anytime soon? Will our creditors cut us off? The failure to address our long term healthcare cost problem is easy to identify: total economic failure. What is the short term problem with the current deficit that eclipses the short term drag on the economy that budget cutting represents?

If there are programs that create no value or could be replaced with more efficient programs, then sure, let's get rid of them. If we do, though, why not put in some temporary stimulus spending to keep the economy going? Are we better off spending less on programs if the resultant drag on the economy means we bring in less revenue and therefore either blunt or eliminate the effects of the cuts on the deficit?

Posted by: MosBen | February 25, 2011 10:21 AM | Report abuse

Since 2009Q3, there has been a negative correlation between government consumption/investment spending and overall GDP growth.

2009Q3: +1.6% GDP, +1.6% Gov
2009Q4: +5.0% GDP, -1.4% Gov
2010Q1: +3.7% GDP, -1.6% Gov
2010Q2: +1.7% GDP, +3.9% Gov
2010Q3: +2.6% GDP, +3.9% Gov
2010Q4: +2.8% GDP, -2.4% Gov

The three strongest quarters for GDP all had falling government spending, and the three weakest quarters saw rising government spending.

Since 2000, there has been a negative correlation between YoY GDP growth and government spending growth.

Posted by: justin84 | February 25, 2011 10:33 AM | Report abuse

Simple answer to the question:

Tea Party republicans advocating cuts.
Washington Post and Beltway pundits advocating cuts (not JOBS).
Others who focus the conversation on cutting deficits not growing the economy.
Obama for failure to engage (in the face of the forces of conventional wisdom that deficits are the issue, not jobs).

Posted by: grooft | February 25, 2011 10:40 AM | Report abuse

arm3, I would imagine that to the extent that SS is stimulative, it's only slightly so. Keep in mind that while it is a lot of money going out, there's also taxes supporting it, which are a constant drag. Now, you've got a good point that the people receiving SS probably spend a higher proportion of the money than the people who paid the taxes, so there's probably some stimulative effect, but its stimulative effect is the difference between how much of the money the senior recipients spend versus how much the original tax payers would have spent. The original tax payers would have likely saved some and spent some on paying down debt, but some significant portion of the payroll taxes would have been spent.

Posted by: MosBen | February 25, 2011 10:47 AM | Report abuse

justin84, there's probably close to 0 causation in your correlation. Maybe you don't remember that whole housing bubble thing, because otherwise, you are making an intellectually dishonest assertion.

Posted by: arm3 | February 25, 2011 11:21 AM | Report abuse

So I'm very worried this morning. The dollar has been dropping all week, when it should have been rising with the turmoil. Furthermore three separate Fed governors have made public statments this week about a possible early end to QE2. They're telegraphing something to the markets. That something is inflation.

These guys don't just speak off the cuff or by coincidence. They've seen something in the data, and not just oil prices, which suggest inflation is coming much farther and faster than they anticipated.

I've never been one of the hyper-inflation guys, but we have to watch very carefully what happens in Europe next month. There is a series of three big meetings about their debt crisis. The permutations are too complex to go into here, but my worry is this.

If they "solve their debt problem" it will be very bad for the dollar. It's still the least likely course, they are Europeans after all, but it's a bad, bad possibility.

I'm hedged, and so less worried about me, but for anyone else who has done nothing to inflation proof your life so far, well, lots of churches are looking for new members!

Posted by: johnmarshall5446 | February 25, 2011 11:37 AM | Report abuse

The more proper name for what we're talking about by the way is "stagflation", an economy that is not growing quickly as this month's report would suggest, but with prices rising all the same.

Posted by: johnmarshall5446 | February 25, 2011 11:40 AM | Report abuse

"Grim GDP news today: We had thought that the GDP grew in the fourth quarter of 2010 by 3.2 percent. We were wrong."

---------------------------------------
Actually, if you look at realistic inflation numbers, GDP hasn't been in positive territory since sometime in '08..

Posted by: illogicbuster | February 25, 2011 11:41 AM | Report abuse

Since 2009Q3, there has been a negative correlation between government consumption/investment spending and overall GDP growth...."

Posted by: justin84 | February 25, 2011 10:33 AM
========================================
There is also a negative correlation between GDP and solar flares!

How can spending money (forget private or Government) have a negative impact on GDP?

If throw in some lag time and the negatives may turn positives!

What a .......

Posted by: kishorgala | February 25, 2011 12:06 PM | Report abuse

I am convinced that Conservative Economic Policies do not work.
Not now, not ever, not in any country, not in any time.

Conservative policies of government spending less, tax breaks for the rich, squeezing money from the bottom 80% of the population, concentrating money at the top 10%, deregulation across the board, increasing the size of the military in all situations, cutting taxes in all situations, constantly driving down tax revenues as a percentage of GDP.

"Worked" would mean economic growth and prosperity for the country as a whole, social stabilization for an extended time (say, 50 years).

Can anyone point to a situation where they can say Conservative policy worked? Any country. Any time in history.

I might be tempted to say Ancient Egypt or Ancient Mezzo America, but the agricultural base was so productive, I am not sure ANY political system could harm the society. And the military might of those countries were necessary for defense. Furthermore, ALL countries in those times used pretty much the same political system, so one could not say that one policy worked better than another.

Is there even ONE example of Conservative policy actually showing it is better than progressive ones?

Posted by: grat_is | February 25, 2011 12:07 PM | Report abuse

As we all know, what we need are more jobs. To generate more jobs we need to see more spending in the USA - not hoarding by the private sector, and not budget cuts by government.

Posted by: Jihm | February 25, 2011 12:08 PM | Report abuse

After reading progressives like Ezra for a while, I might conclude that higher taxes actually HELP an economy.

There seems to be a LOT of data supporting this contention.

Posted by: grat_is | February 25, 2011 12:09 PM | Report abuse

Historians looking back at this period will marvel at the sheer stupidity and wrong-headedness driving our policies right now. The idea that deficit cutting should be our top priority is economic lunacy, and millions of Americans are suffering because of it.

Posted by: steveandshelley | February 25, 2011 12:32 PM | Report abuse

Putting all the stuff about the national debt and deficits aside, I think there is a much larger likely insoluble problem.

First, productivity gains have drastically reduced the labor required for all sorts of products and processes. This goes from huge reductions in ranging from bookkeeping, engineering (designing a power transformer for example), construction of buildings and infrastructure, marketing, and intellectual research. We just don't need so many bodies anymore.

Second, demand is leveling off as needs are satisfied. We have the replacement demand for appliances, autos etc, but those markets aren't growing and there is no reason to expect them to grow. Everbody already has their DVD player, cell phone and flat screen TV. I call this the "First Law of Forks".

If you never had a fork, you'd pay big money for your first one, even if it was bent and easily rusted. However, after your first four or so fork replacement cycles, you are are seldom going to be in the market for additional or replacement forks.

From my perspective, the largest area for growth is infrastructure; fixing and rebuilding roads, bridges, dams, creating new and modernized transportation systems. But this isn't going to happen. This is stuff associated with local, state and federal spending.

The great and viral tea party concern about government spending and deficits are going to stop it cold in its tracks.

I see no reason to be other than pessimistic about the economy and jobs both short term and long term.

Posted by: billsecure | February 25, 2011 12:38 PM | Report abuse

We spent thirty-plus years building a comsumer-centric economy -- mostly based on people buying things they don't need on credit. No surprise that it was unsustainable, and no amount of government spending will change that. It will take years, if not decades, to morph ourselves into a society whose lifestyle is premised on lower material expectations. Until then, keep dreaming.

Posted by: NoVaPatriot | February 25, 2011 12:42 PM | Report abuse

"The problem isn't that we're spending too much but that, in an effort to cut deficits, we -- particularly state and local governments -- are spending too little."

State and Local can't spend money they don't have, that's illegal. Where do you propose they get the extra money from, Uncle Obama?

Posted by: kitchendragon50 | February 25, 2011 12:45 PM | Report abuse

steve:

"Historians looking back at this period will marvel at the sheer stupidity and wrong-headedness driving our policies right now. The idea that deficit cutting should be our top priority is economic lunacy, and millions of Americans are suffering because of it."

What???? See my post above on inflation.

Posted by: johnmarshall5446 | February 25, 2011 12:49 PM | Report abuse

Well Ezra, businesses invested in the third quarter because the incentives to do so expired in the fourth. As for the government investments, it's a dire shame that our governments have that big of an effect. The government needs to shrink and we need to put new tariffs on imports so that America becomes a producing nation again. The service economy which boomed for 2 decades seems to be ending. The country as a whole has had it too good and now people are going to have to accept a different lifestyle as the norm. Houses will go back to being domiciles and not investment vehicles and the credit industry needs to be left alone. Buy with what you have and can afford. The credit bubble has burst. Learn from our mistakes.

Posted by: Jsuf | February 25, 2011 12:50 PM | Report abuse

Thanks for telling the truth.

Current right wingers seem determined to drag the country into a new depression.

Posted by: rapchat1 | February 25, 2011 12:53 PM | Report abuse

Posted by: grat_is: "After reading progressives like Ezra for a while, I might conclude that higher taxes actually HELP an economy. There seems to be a LOT of data supporting this contention."
-----------------------------------------

Okay, let's do a quick test of that theory:
"Higher taxes are better for an economy"

Okay, if higher is better, raise taxes to 100%. See what happens.

Obviously, your proposed theory is insanity.

Posted by: illogicbuster | February 25, 2011 12:56 PM | Report abuse

"justin84, there's probably close to 0 causation in your correlation. Maybe you don't remember that whole housing bubble thing, because otherwise, you are making an intellectually dishonest assertion."

I am merely stating an empirical fact. There is a negative statistical relationship between GDP growth and the growth rate of government spending on consumption and investment. It isn't a strong one, and I'd agree with you there is no causation.

Ezra's making the claim that government spending is too low, and by increasing government spending we can significantly increase GDP growth.

That hasn't been borne out by the data, at least over the past decade, and in particular during the Great Recession.

My view is that government deficit spending mostly shifts money around, rather than making a large impact on net spending. Changes in the growth rate of government spending don't appear to cause changes in GDP growth rates.

I'm happy to see you agree with me.

Posted by: justin84 | February 25, 2011 1:02 PM | Report abuse

My God - Ezra is clueless - the Federal government is nearly broke and many state ARE broke, but Ezra wants to spend more......but spend more of what? These states don't have money. I guess this fool wants to have states borrow even more...or God forbid raise taxes right in the middle of a recession. The last years of the kind of garbage Ezra is suggesting is the reason we are still mired in no growth and high unemployment.

Liberal Socialists like Obama and Ezra will NEVER get it, but after 2012 what they think won't matter as both will be thrown into obscurity.

Posted by: Realist201 | February 25, 2011 1:03 PM | Report abuse

"Who is holding the economy back?"

Wall Street & the Federal Reserve!!

Using taxpayers money to play on the commodity market is just driving prices up, for not just oil ....... if you can not see it then guess these financial institutions have us "hoodwinked."

Posted by: bkarpus | February 25, 2011 1:08 PM | Report abuse

The first problem with all the stories about economic growth is that the number does not really mean anything that anyone understands. If an economy sells an aggregate computing power that is 100 times the rate of a decade ago and the aggregate cost is half the old value, does that really mean the economy has declined by 50%. The real value these dollars buy is constantly changing and has no easily understood relationship to their magnitude. Leaving that problem aside, there are several trends of uncertain magnitude and uncertain future that pose a problem for our economy. One is the residual problem of dealing with excesses that built up over the past couple of decades. That includes the employment and benefit issues that state governments are dealing with. It also still includes the residual problems from the house price bubble. It also includes private financial decisions based on unrealistic expectations of what retirement incomes might look like. Another trend is the changing nature of work. Both automation and global competition are deflating the value of labor. Another trend is the potential for commodities limitations to become the factor that constrains the top of an economic cycle. The United States has major unresolved issues with house prices, major unresolved issues with state and local government finances, the highest unemployment in decades, and new issues from all the federal government borrowed money that has been pumped into our economy without any consideration of its long term consequences. Those problems still exist at a time when oil is already hitting $100 per barrel and parts of the global economy are already overheating. Only time will tell how these factors and those which have generated some upward momentum for our economy turn out. But anyone who sees some bucolic path to an idyllic future has a habit that is in need of some serious attention.

Posted by: dnjake | February 25, 2011 1:12 PM | Report abuse

Ezra is a skinny, young, IDIOT.

Ezra do you know that most States have to have a balanced budget by LAW. As opposed to the FEDS, the States cannot PRINT money or BORROW it from China. Sure there are short-term fixes, smoke and mirrors. But most States have run out of smoke and the mirrors are broken.

Ezra, you are an IDIOT! Go back to grad school, or wherever your relatives on the Post found you!

Posted by: beecheery | February 25, 2011 1:12 PM | Report abuse

rapchat wrote:

"Thanks for telling the truth.

Current right wingers seem determined to drag the country into a new depression"

What?

Posted by: johnmarshall5446 | February 25, 2011 1:19 PM | Report abuse

illogicbuster:

what an inane comment.
One could say the same for bringing all taxes to 0.

Obviously, there is an optimum range between 0 and 100.
High taxes do not seem to be hurting the Scandinavian countries.
While I donot see low tax countries like the Arab states doing all that well.

And I do not see us doing so well with low tax rates.

Adam Smith postulated that redistribution of wealth was necessary for a better working capitalist system. I agree.
I see other countries having a faster recovery and better median standard of living. It seems to me tax rates are related.

Posted by: grat_is | February 25, 2011 1:32 PM | Report abuse

Serious question: If state and local governments spend more money which, in turn, props up the GDP for a quarter, isn't that growth just "on paper"? I mean, assuming the Fed didn't just print the new money and hand it over (which I know is one method), the government still has to pay back the debt, right?

In what way is this different than taking out a loan for $1 million and proclaiming yourself rich?

I understand the big picture idea of Keynes, that this temporary spending can jumpstart the economy so that it's more like a business investment. But that doesn't seem to be the point Ezra is making here:

"The gross domestic product is essentially a measure of people buying and investing in things. When the government cuts back on its purchases and investments, it's the same as a substantial portion of the population cutting back on its investments and purchases."

This seems to say that, in and of itself, government spending propping up the GDP is a good thing -- that a higher GDP is an end in itself.

Posted by: dpurp | February 25, 2011 1:34 PM | Report abuse

steveandshelley: "Historians looking back at this period will marvel at the sheer stupidity and wrong-headedness driving our policies right now. The idea that deficit cutting should be our top priority is economic lunacy, and millions of Americans are suffering because of it."

What deficit cutting has actually taken place, outside of a few states like NJ? Who are these millions of Americans who are suffering because of these fictitious cuts you cite??

Where were these liberals 5 years ago, when they were screaming that the Bush deficits would bankrupt the country?

Posted by: Jake43 | February 25, 2011 1:43 PM | Report abuse

Those who think there are no consequences to our debt situation are clueless to countries who have done the same. Hitler came into power because of Germany's debt and following hyper inflation. If big gov't spending was optimal solution, libs like Klein would be listing those successes every day. They don't because there are no examples of success, only failure.

This spending will come to an ugly conclusion. No consequences for $14T+ debt. No consequences for running up $4.5T in 3 years? No consequences for endless $1T deficits? Get a clue folks and do a minimal amount of reading on countries that outspent the public.

As far as the economy, an energy strategy that focuses on 100 yr old technology (wind mills) and 40 yr old technology (expensive and inefficient solar panels) is a serious tax on the economy. A healthcare plan that doesn't address healthcare costs is creating uncertainty in the business community. Over bearing regulations are inhibiting banks ability to loan and creating unnecessary overhead costs for businesses. An anti business message from this administration creates even more uncertainty.

BTW, check Politico for an article on how Obama is meeting lobbyists regular off WH grounds. Those who believe Obama's transparency claims likely also believe we can spend indefinitely w/o consequence.

Posted by: Tostitos | February 25, 2011 1:54 PM | Report abuse

GOP governor in Florida killed a $2.4billion dollar transportation project that would have produced 24,000 jobs because ?;it was 90% funded by the feds. GOP is doing everything they can to sink America. We can not have it both ways grow the economy (cut taxes for the rich)and reduce the deficit. Only the Democrats have a track record of decreasing the grow of the national debt. The past four republicans presidence increased the deficit by 15% - 27%. Check the record if you can handle the "truth".

Posted by: Vonnie932 | February 25, 2011 1:56 PM | Report abuse

What is holding the economy back?

Ezra, you missed the obvious answer....Obama is holding the economy back.

Despite $1 Trillion of "stimulus" we still have anemic growth, why? Where should I start?

Obama's fetish for Green Energy jobs (aka Federal Subsidies for "Make Work") kills jobs. First investors will not invest in the Green economy because it is not profitable and they realize that the subsidies will soon be cut. Additionally, it takes spending from real, productive, self sustaining, economy growing jobs.

Also anti-growth is Obama's support of Unions in the states. This is a policy that makes taxpayers pay a premium wage to public servants. The net effect is that we get inferior government services for the money we spend. Consider for example, if in this economy there are teachers who would work for less or perhaps some who would choose to teach even if they had to save for the majority their retirement and post retirement health care like the rest of us. By paying teachers more than the market rate for their services we get fewer teachers for the money we spend or in other words an inferior product for the price. This hurts economic growth on two fronts; today it means that the premium dollars we are paying are not being invested in productive pursuits; in the future it hurts growth since our children are poorly educated.

Basically, all of the Obama agenda is anti-growth. Basically, all of Obama's agenda is about picking winners and losers (and he seems to always picks the least productive option). Basically all of Obama's agenda is about taking wealth from those who we need to create wealth, jobs and growth. Who in their right mind will take risk to create wealth in this environment.

Ezra, you should be telling your readers to support the GOVENORS of the mid-west if you want growth.

Posted by: ELF2 | February 25, 2011 1:57 PM | Report abuse

"I understand the big picture idea of Keynes, that this temporary spending can jumpstart the economy so that it's more like a business investment. But that doesn't seem to be the point Ezra is making here:

"The gross domestic product is essentially a measure of people buying and investing in things. When the government cuts back on its purchases and investments, it's the same as a substantial portion of the population cutting back on its investments and purchases."

This seems to say that, in and of itself, government spending propping up the GDP is a good thing -- that a higher GDP is an end in itself."

I think the end should be that we are safe, have food, housing, etc. and to the extent possible, have a comfortable standard of living. A functional capitalist economy is one way of obtaining this, maybe even the best way - lots of people seem to think this is so.

The whole thing is kind of a confidence game, though, and requires everyone to continue playing: money has to be spent for people to get paid so that they can spend money, and so on. When people stop spending for one reason or another, it starts to break down.

There are lots of reasons people stop spending.

The federal government serves as "the rules" in this game and often acts as an agent for keeping the game going. One way that it can do this is to spend when the population for one reason or another has decided not to. It can "jump start" an economy this way because it is in the unique position to borrow money for immediate spending on the promise of repayment in future revenues. The bet is that future revenues will be equal to or better than what it also requires to function as "the rules".

The game appears to be collapsing now though because people are unwilling or unable to spend while conservatives hobnail the government from jump starting things because they don't like "the rules" the way they've been implemented in the past.

My take is that what they want won't improve the game, because their priorities tend to concentrate wealth at the top, where it isn't spent back into the economy. I contend that the economy works much better when money finds its way into hands more ready to spend it.

Posted by: arm3 | February 25, 2011 2:05 PM | Report abuse

"what an inane comment.
One could say the same for bringing all taxes to 0."

I disagree. I think the U.S. would be much better off than it is today with no mandatory taxes.

"I see other countries having a faster recovery and better median standard of living."

Such as...?

Singapore?

Posted by: justin84 | February 25, 2011 2:13 PM | Report abuse

Other fundamental problems:

(1) The inherent conflict of the notion of citizen as labor input v. citizen as consumer; and

(2) The corporate conflict of return on investment to shareholders v. to employees.

(1) echoes problems stemming from the rational mind - we want to minimize or free ride on costs as much as possible to maximize profits, but profits depend on sales to consumers, i.e. we don't want to pay people but we still want them to buy our stuff. (2) goes to people being treated as inputs versus as vital partners. I would say that it is a moral failure on our part when corporations treat their employees more as the former rather than the latter, and I think this is exacerbated when corporate shares are traded publicly. Unionization is an aggressive natural response to this failure.

Other factors exacerbate these problems, such as the size of eligible populations for limited positions, and the extent to which a government intervenes.

Posted by: arm3 | February 25, 2011 2:19 PM | Report abuse

"Since 2009Q3, there has been a negative correlation between government consumption/investment spending and overall GDP growth."

justin84,

Out of curiosity, are your "government" spending stats based only upon the federal government, or are the net aggregate of federal, state, and local governments?

Posted by: Patrick_M | February 25, 2011 2:22 PM | Report abuse

UNTOL OBAMA IS GONE AND REPLACED BY A REPUBLICAN, NOTHING WILL GET BETTER. BUSINESS PEOPLE KNOW OBAMA IS NOT ON THEIR SIDE. THEY DON'T TRUST THIS COMMUNIST MUSLIM.

Posted by: COOLCHILLY | February 25, 2011 2:24 PM | Report abuse

@Vonnie932: So even if it is 90% funded by the Federal Government, where is the money coming from? Look at the big picture will you? The only way the government gets its funding is from tax payers. So you increase taxes in order to increase the debt? Think about it ......it doesn't make sense. There is nothing new generated.

Posted by: Jsuf | February 25, 2011 2:27 PM | Report abuse

In the big picture, the fix is clear. Health care is rationed, and Grandma lives with one of her kids when Grandpa dies. Or worst case, Grandma and Grandpa live with their kids when the 2nd one retires. Those 2 changes solve every major social policy challenge we face. The problem is convincing every American of the necessity of these changes.

Posted by: taxguru | February 25, 2011 2:28 PM | Report abuse

Governing spending does not create economic growth. The government takes money that consumers would have spent on their priorities, and spends it on the government's priorities.

Posted by: pmendez | February 25, 2011 2:29 PM | Report abuse

If the 47% of Americans who pay no federal income tax actually contributed some there would be more money for the federal government to spend. But as it stands now you could take all the wealth from the 7.8 million millionaires and the 403 billionaires and we woouldn't come even close to paying off our current debt.

"Taxing the rich" is not a viable plan, when their money is gone then what?

Posted by: cathyjs | February 25, 2011 2:31 PM | Report abuse

The other major change needed is to convince the average American it is more important for their kid to excel at math and science than to be the captain of the football team. Until we can get as many members of the community to show up to watch the science fair as show up on Friday night for high school football, we are doomed to lose the competition for jobs to people in other countries.

Posted by: taxguru | February 25, 2011 2:32 PM | Report abuse

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that “the buck stops here.” Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.” - Sen. Barack Obama (D-IL), March 20, 2006

The debt ceiling was $9T at that time. It's over $14T today and will be $17T when Obama finishes his four years. He's right about one thing, he's been a complete failure showing leadership on anything.

Here's an idea for Obama. Put together a debt commission so your koolaid drinkers can see how much importance you put on the debt and deficits. Guys like Klein will wet themselves giving you credit for leadership.

Posted by: Tostitos | February 25, 2011 2:35 PM | Report abuse

Ezra, the economy is held back by globalization whereby we allow others to sell to us many more "household trinkets" than we sell them "sophisticated technology" products or agricultural products. We just spend more overseas to improve their middle class than spending within to improve ours. For example, the economy will improve when we make imported goods have a five year warranty executed by local businesses instead of throwing the thing away after the first year warranty expired. It's really that simple.

Posted by: myonecent | February 25, 2011 2:40 PM | Report abuse

If a 15 or 16 trillion dollar economy, does anyone seriously think that cutting 100 billion dollars out of federal spending is really going to change things one way or another? Simply put, we are talking about a figure far less than 1% of our GNP.

I am always amazed at what never manages to make it into Mr. Klein's comments. For example, for years and years the savings rate of Americans was for all practical purposes ZERO. People should take a look at the savings rate of people who are employed if they want to learn something. At the same time, they could also take a look at how people with jobs are paying down credit card bills. Simply put, the days of having a consumer based economic growth may well have changed to something far different.

I know the problems in the residential real estate market have received a whole lot of attention. This being said, the problems in the commercial real estate market are much worse. How far this sector of our economy is under water is open to debate but it is at least one trillion dollars and quite possibly a great deal more. Here is a drag on our economy that it seems this author does not know exists.

Simply put, Ezra Klein may well be a bright fellow and obviously is well read. This being said, he is not an economist and really does not know what he is talking about.

Posted by: jeffreed | February 25, 2011 2:54 PM | Report abuse

The Republican nut jobs are to blame -
they are determined that President
Obama will not be re-elected.

President Obama will be re-elected -
he is an extremely intelligent,
cautious President, and the best
thing that has happened to America
in years!

Go President Obama!

Posted by: Sirius2 | February 25, 2011 3:03 PM | Report abuse

The Republican nut jobs are to blame -
they are determined that President
Obama will not be re-elected.

President Obama will be re-elected -
he is an extremely intelligent,
cautious President, and the best
thing that has happened to America
in years!

Go President Obama!

Posted by: Sirius2 | February 25, 2011 3:05 PM | Report abuse

The idea that there is a "who" responsible for this is absolutely ludicrous.

Truly...what is WRONG with these people?

Posted by: wcmillionairre | February 25, 2011 3:29 PM | Report abuse

"Out of curiosity, are your "government" spending stats based only upon the federal government, or are the net aggregate of federal, state, and local governments?"

Federal, state and local. Purchases only, not including transfers.

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=1&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=2000&LastYear=2010&3Place=N&Update=Update&JavaBox=no

Data inclusive of transfer payments are here - note that these are nominal dollars, and thus only direclty comparable to nominal GDP.

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=86&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=2000&LastYear=2010&3Place=N&Update=Update&JavaBox=no

There doesn't seem to be a consistent trend between the government spending stats and GDP stats. Sometimes they move together, sometimes not.

I used annual GDP and spending data (nominal, spending including transfers) from 1929-2009.

I then put a scatterplot of private sector growth (C+I) and government spending, and ran a regression. Basically no correlation (-0.066x + 0.71, r^2 0.01).

Some interesting things to note:

Nominal government spending grew 10.0% from 1929 to 1932, whereas consumption and investment fell 46.8%. Note that there was massive deflation during this time period, so real government spending rose by several times that amount.

Nominal government spending grew 4.7% in 1935, 14.3% in 1936, -6.3% in 1937 and 10.0% in 1938. Private spending for those same years was 13.4%, 13.1%, 11.6%, -9.6%. Is it obvious that a crash in government spending caused the Roosevelt Recession? I'm not so sure. Can a 6.3% cut in government spending cause a 20 percentage point reversal in private sector spending growth?

From 1941-1944, nominal government spending grew 281.1%, and nominal private spending grew 17.4%. From 1944-1947, nominal government spending fell 34.8%, and nominal private spending grew 69.1%.
In dollar terms, government spending rose from $19.6 billion in 1941 to $74.7 billion in 1944, then fell to $48.7 billion in 1947. Private spending was $99.2 billion in 1941, rose to $116.5 billion in 1944, and then surged to $197 billion in 1947.

Posted by: justin84 | February 25, 2011 3:38 PM | Report abuse

The problem is ownership of the GOP, Tea Party, Supreme Court, House of Representatives, Beck, Limbaugh, Coulter, Rove and all of Fox News by the Koch Brothers, and other billionaire CEOs.

That's a FACT!

Posted by: lufrank1 | February 25, 2011 3:53 PM | Report abuse

Ah yes, I didn't even have to check. This column must be linked on the front page because the idiots are out!

jeffreed:

You've got some interesting points. How do you think the need for refinancing all the commerical loans that come due starting next year will turn out?

You should visit here more often.

The other newbies who write in all caps or want to call names, feel free to exit at any of the doors clearly marked for that purpose! LOL

Posted by: johnmarshall5446 | February 25, 2011 4:17 PM | Report abuse

The large corporations are holding back the economy, of course. They are sitting on trillions of dollars but refuse to hire anyone. Small businesses, who do want to hire, cannot get loans. I wish there was some way to get that money back from big business and give it to small business. If big business isn't using the money, they obviously don't need it.

Posted by: lyndee1 | February 25, 2011 4:22 PM | Report abuse

With a right-wing dominated Congress it is obvious to any observer, especially foreign businessmen, an unstable United States is no place to invest or trade.

That means we don't have anywhere to send our exports. Besides, most of them are repacked Chinese knock-offs of European-designed goods anyway.

With our unregulated banking industry and a health care insurance industry raking in huge profits for no service it is hard to see anything positive about our economy.

The government claims unemployment is falling, but there are no new jobs. ADP says unemployment is now 10.3% with under employment another 9%. So, why doesn't someone tell us where the jobs are.

The ripoff artists in Wisconsin are throwing thousands of public workers out of a job plus seizing their pensions. Indiana is following suit. The right-wingers in Washington are ramming their ideologically-offensive job-killing agenda down our throats.

The right-wing propaganda machine cranks out a ceaseless cloud of disinformation, lies and attacks on everyone not named Limbaugh. The hate and fear they generate has all but destroyed this country. And no one will stand up to these monsters and demand a halt to the hate. An entire generation has been programmed to hate everything we were taught to love about this country and its people back in the 50s, 60s and 70s.

So, tell us, Media Minion, what do we have to look forward to? Higher gas prices with inefficient vehicles.

Year after year, day after day, the longer the right-wingers are involved in our governments things in this country get worse and worse. The only positive thing we can look forward to is an election, if the right-wingers don't find a way to steal that one like they did in 2000.

Posted by: PoliticalPrisoner2012 | February 25, 2011 4:31 PM | Report abuse

justin84,

Thanks for the detailed clarification!

Posted by: Patrick_M | February 25, 2011 4:38 PM | Report abuse

Government deficit spending does not contribute to GDP - it can increase GDP today, but it reduces future GDP. Deficit spending is borrowing from the future, pure and simple.

Posted by: _BSH | February 25, 2011 5:00 PM | Report abuse

Poltical prisoner:

Why so gloomy? You're perspective is way out joint. Contrary to your statement the 1950's was one of the zeniths of hate and fear in this nation. You just didn't see it live on tv sticoms of the era.

Posted by: johnmarshall5446 | February 25, 2011 5:01 PM | Report abuse

Posted by: Jsuf
@Vonnie932: So even if it is 90% funded by the Federal Government, where is the money coming from? Look at the big picture will you? The only way the government gets its funding is from tax payers. So you increase taxes in order to increase the debt? Think about it ......it doesn't make sense. There is nothing new generated.

++++++++++++++++++

The Big picture is about forward vision - the condition the US is in now is not how it will always be; think about tourism at Disney World etc. If the GOP (party of STOPPING ALL PROGRESS FOR America at this time 2009-2012) would allow the president to lead them, the US would have been better off than having to drag the country towards recovery. Florida's politians had approved of this deal since 2008 or prior.

Posted by: Vonnie932 | February 25, 2011 5:02 PM | Report abuse

"Thanks for the detailed clarification!"

Anytime.

"How do you think the need for refinancing all the commerical loans that come due starting next year will turn out?"

I'd expect refinancings will go well, barring a huge economic shock. Rates remain low, and banks have rebuilt a lot of capital.

Posted by: justin84 | February 25, 2011 5:09 PM | Report abuse

I knew it. I knew it. Didn't have to read one word of Wisdom.
The headline, "who is holding the economy back" by Ezra Klein
told me ... it's the Republicans. Next column.

Posted by: kurtmudgeon1 | February 25, 2011 5:18 PM | Report abuse

I knew it. I knew it. Didn't have to read one word of Wisdom.
The headline, "who is holding the economy back" by Ezra Klein
told me ... it's the Republicans. Next column.

Posted by: kurtmudgeon1 | February 25, 2011 5:19 PM | Report abuse

ANSWER: OBAMA

Posted by: wheeljc | February 25, 2011 5:24 PM | Report abuse

Ezra,
You are a 26 year old punk who never has had a real job. Why don't you try maxing out all of your credit cards and see if that helps your personal economy.

Posted by: j751 | February 25, 2011 5:46 PM | Report abuse

The coming Day of Reckoning in D.C. will see the TERMINATION of THOUSANDS of Gov workers.

Homes will be virtually given away FREE as desperate States seek ANYONE with a job to pay their RE taxes.

Posted by: notinca | February 25, 2011 6:12 PM | Report abuse

government cuts back on its purchases and investments, it's the same as a substantial portion of the population cutting back on its investments and purchases.

//////////////////////////////////////////

and just as the substantial portion of the population it cannot spend what it does not have. due to the high rate of unemployment we currently have, tax revenues are down, by raising taxes on the current employees you take away spending or saving money from their pockets.

It is no myth that most local and state governments need to scale back the number of employees and crack down on medicare, welfare, and foodstamp abuses, alot of people scam the system by claiming to be disabled also.

Posted by: greenstheman | February 25, 2011 7:33 PM | Report abuse

Who is holding the economy back?
- - - - - - - - - -
The same people that destroyed it.

Posted by: MichaelLittleBig | February 25, 2011 8:16 PM | Report abuse

johnmarshall5446

If the housing bubble is the root cause of the economic problems, the result being deflation in housing values, wouldn't some inflation tend to offer some correction? A decrease in the value of the dollar also increases exports and decreases imports. I had assumed that was the intent.

Posted by: timothy2me | February 25, 2011 8:34 PM | Report abuse

Strangely, its law enforcement that ultimately is restraining the economy.

Law enforcement has not confronted the banks which are committing billion dollar fraud, RICO size rip offs of consumers.

Law enforcement never prosecuted the CDO fiasco which destroyed the housing market.

Law enforcement has not busted Congress that gave banks 750 billion dollars in illegal gifts of public funds from the taxpayers.

Law enforcement has not prosecuted the banks that launder drug cartel money for the Mexican cartels, the Afghan drug lords or any of the other major crooks.

So banks are allowed to illegally collect 30% interest from consumers because Congress will not roll back the Marquette decision which legalized loan sharking.

Because law enforcement lets Congress keep the millions in payoffs that pave the way for the banks to steal from the American people.

Law enforcement lets Congress keep the dishonest millions paid by oil interests that make possible the Iraqi war that cost taxpayers 4 trillion and bankrupt our government so oil moggles could gain billions from oil pumping contracts out of Iraq.

Law enforcement has failed us.

They have not disclosed who committed the largest mass murder on US soil in our history on 9/11.

They have not stopped the banks from destroying the economy.

They were supposed to hold the line, and they did not.

And so chaos and unraveling of one of the greatest economic engines in the world.

Posted by: inojk | February 25, 2011 8:48 PM | Report abuse

@ inojk | February 25, 2011 8:48 PM
--------------------------
your posting was very well stated.

I would only add that we need strict term limits for Congressional seats in the House and the Senate.
The Congress has been complicit with the Wall Street Bankers in the destruction of the American economy and in fact the well being of the American people.

Posted by: MichaelLittleBig | February 25, 2011 9:19 PM | Report abuse

Ezra Klein, WaPost: “The federal government's spending dropped by 0.2 percent, but state and local spending dropped by 2.4 percent. The gross domestic product is essentially a measure of people buying and investing in things. When the government cuts back on its purchases and investments, it's the same as a substantial portion of the population cutting back on its investments and purchases.”

In both cases, the money needed to ‘spend’ is being borrowed at about 2% interest, because it is not being created by taxation. Which comes first, deficit style spending or increased revenues? Both state and federal governments have been counting on revenues increasing at a much higher GDP and ALREADY SPENT IT FOR THE NEXT TEN YEARS. What happens if governments keep dropping their spending at 8% per year for that same ten years as the GDP increases at 4%? Would they have interest on borrowed money still to pay?

Posted by: arjay1 | February 25, 2011 9:37 PM | Report abuse

"If the housing bubble is the root cause of the economic problems, the result being deflation in housing values, wouldn't some inflation tend to offer some correction? A decrease in the value of the dollar also increases exports and decreases imports. I had assumed that was the intent."

One of the problems is difficulty in controlling where the money goes. The fundamentals in the housing sector remain awful. It will take a ton of inflation to bring home prices up - that inflation is likely to have a greater impact on other sectors.

Suppose Fed action increases your home's price from $175,000 to $185,000, but gasoline is now at $5/gallon, and your grocery bill is 25% higher. Are you better off?

Trying to prop up housing was a mistake. Some of today's demand for homes was borrowed in 2009 and 2010. The bottom in prices might still be yet to come. Prices should have been allowed to fall, which would have brought new buyers into the market, helping with the inventory reduction process and ending the correction.

One of the major problems with the housing boom was that it redirected labor and capital into the wrong sectors. After the 2001 recession, we though easier money was the answer. Loose monetary policy from 2001-2005 helped fuel the housing bubble, setting the stage for the subsequent collapse. In fact, monetary policy was made loose in 1998 (LTCM/Russia/Asia) and 1999 (y2k liquidity concerns), exacerbating excess investment into the tech sector, and thus the previous boom/bust cycle.

Posted by: justin84 | February 25, 2011 11:06 PM | Report abuse

Thanks for the reply, arm3. I still am not sure Ezra is saying what you're saying, but your reply makes sense.

Posted by: dpurp | February 25, 2011 11:21 PM | Report abuse

timothy wrote:

"If the housing bubble is the root cause of the economic problems, the result being deflation in housing values, wouldn't some inflation tend to offer some correction? A decrease in the value of the dollar also increases exports and decreases imports. I had assumed that was the intent."

I just saw this today, so maybe you have moved on.

As I understand your question, you want to target inflation to the housing sector. However our ability to do so is really like chemotherapy, especially in the earlier years of that treatment.

Spread a poison through the body, which we can't control once released, in the hopes that it kills off more of the cancerous cells than the healthy ones. Inflation doesn't work in a vacuum. For instance the price of a 30 year fixed mortgage is keyed to the price of the 10 year Treasury note. At the first signs of inflation the yield on the 10 year goes up, as it did in the last 6 months, forcing mortgage rates up with it. So what may lift the housing market, may also kill it at the same time.

If you're still around, we can discuss this further.

Posted by: johnmarshall5446 | February 26, 2011 12:36 PM | Report abuse

Ezra:

Your points are quite valid but you must remember that we the consumer spend over 6x what state and local governments spend.
If consumer spending stays strong or even gets stronger in the next few months, government budget cutbacks should have little effect on our economic growth. Strong consumer spending with heavy job creation should eventually get us out of this miserable hole.

Posted by: patrickclarke | February 26, 2011 6:29 PM | Report abuse

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