The so-called “fiscal cliff” has dominated the debate in Washington over the past few months, and no doubt, you’re sick of hearing about it. But the dog-and-pony show you see on the news obscures really important issues.
Fortunately (or unfortunately), mixed economic data released in the past week shows just how important the budget debate is, and how policy uncertainty is having a real material effect on Americans’ lives by curtailing economic growth.
Last week, you might have heard two numbers: 0.1 percent and 157, 000. The first number is the rate at which fourth quarter GDP declined in the United States. Yes, declined. The economy shrank. But, before you freak out, consider this: the private sector actually grew.
A deeper look into the numbers reveals that the surprising GDP decline was caused not by business contraction, but rather by government contraction. A sudden drop off in military spending put a sudden halt to economic growth. This is how our economy can simultaneously shrink and add 157,000 jobs.
While the House may think Keynesianism is bunk, the real-world behavior of the economy shows otherwise. The economic recovery is still fragile, and, instead of cutting government spending, we should be doing exactly the opposite. I agree in principle with the notion that we should strive for a balanced budget, but not at the expense of economic growth.
The jobs report is particularly interesting, considering that the economy added about 150,000 more jobs at the end of 2012 than previously estimated. This report also shows that the economy added around 335,000 more jobs than estimated for all of 2012. This essentially means that the economy is fairly stable, and we’re seeing modest, but not spectacular, job growth. These numbers aren’t enough to truly tackle the issue of long-term unemployment, but we’re keeping up with population growth and then some.
What’s interesting is that the debate is not focused on the interweaving, complex issues that underlie robust growth, but rather a frankly stupid technicality: the debt ceiling. Republicans in Congress are using this technicality to hold the country, and the global economy, hostage.
If you’re unaware, the debt ceiling is the maximum amount of debt the government can borrow. This is distinct from the amount of money the government has already decided to spend. You’d think they’d be the same, but they aren’t.
Why a U.S. government default would be disastrous for the global economy is an incredibly complex issue, and one which I won’t detail now, but I think we call all agree that it’s immensely hypocritical to prevent the president from borrowing money for programs that Congress itself decided to fund.
Smartly, congressional Republicans decided to avoid default, but now we’ve only pushed the fight down the road for a few more months. In the meantime, the unnecessary uncertainty will continue to hamper economic growth. We need to come up with a sensible budget deal now, one that doesn’t include harmful cuts to government spending or risk crashing the global economy.