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Drop in GDP at the end of 2012 is a warning on austerity

Economic expansion continues...for now
by Masao Suzuki |
February 11, 2013
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San José, CA - On Jan. 30, the Commerce Department reported that Gross Domestic Product, or GDP, fell by a very small amount (0.1% at an annual rate) in the last three months of 2012. The drop in GDP was largely because of a big drop in federal government purchases of goods and services, in addition to a drop in inventories (meaning that stores sold goods that were sitting on their shelves instead of having more produced) and a drop in exports.

While much of the media and even some economic textbooks describe a recession as two quarters or six months of decreasing GDP, this is not the official definition of a recession. For example, to use this rule, there was no recession in 2001, since GDP did not decline for six months in a row. But to deny that there was a recession wouldn’t make sense, given the large economic downturn and loss of more than 2.5 million jobs.

The official definition of a recession uses employment, business sales, personal income and industrial production to measure when there is a wide and long-lasting economic downturn or a recession. Since these measures do not move in lockstep, employment is the most important of the four, with the peak and following decline in the number of total jobs being the official definition of when a recession starts. Recessions are also usually preceded by a large drop in spending on housing (as in the last recession) or spending on new business plant and equipment (as in the 2001 recession).

However the GDP report showed that businesses continued to spend on new plant and equipment, and gains in housing construction continued. Then on Feb. 1, the U.S. Department of Labor released its report on the labor market in January, showing that the economy added 155,000 jobs. These are strong signs that the economic expansion which officially began in June of 2009 continues, at least for the time being.

However the drop in GDP caused by federal government cutbacks is a warning that the austerity drive by government is going to weaken the economy. While state and local governments have been cutting spending for years (including even more cuts in the last three months of 2012), federal government spending has been holding up. But with the automatic spending cuts scheduled for March 1, and years of more spending cuts in the works under the 2011 Budget Control Act, decreases in federal spending are more and more likely.

Since the end of World War II, the U.S. government has used Keynesian policies to change interest rates, government spending, and taxes to try to combat recessions. There was a large effort by the Obama administration to cut taxes, increase spending and maintain low interest rates to put an end to the last recession, which was the worst since the Great Depression. Federal government borrowing and spending have helped to shorten recessions; they have not been able to prevent them, as recessions are a fundamental part of a capitalist economy.

Under capitalism, workers are not paid for the full value of what they produce, which is the source of profits. This limits the ability of the vast majority of people, who have to work for others, to be able to spend. At the same time, the profits from the exploitation of workers is reinvested in new plant, machinery and equipment, increasing the ability to produce. The contradiction between the limits on spending and ever-growing ability to produce lead to what Marx called crisis of overproduction, and which are commonly called recessions today.

The government Keynesian policy tries to use deficit spending to stimulate the economy out of a recession. This leads to an increase in the federal government debt, which both Republicans and many Democrats are using to push more austerity - higher taxes on working people (like the payroll tax) while cutting government spending on programs that can actually help working people (like financial aid for college). Not only is this unfair, but it also slows the economy, leading to fewer jobs and more unemployment. At its worst, austerity can push a weak economy into a recession and even a depression. This is what has happened in Greece and Spain, where the austerity measure demanded by Germany and other euro-zone countries have pushed their economies into deep depressions, with unemployment rates of 25% and more.