Government Austerity Drives Private Sector Growth

The Obama Administration screamed during the government shutdown last October that cutting federal spending would tank the economy and lead to higher unemployment, but the Bureau of Economic Analysis announced that despite a huge 4.6% quarterly cut in federal spending over the months of October, November, and December, the private sector economy accelerated by a roaring 3.6%. 

Furthermore, the U.S. Labor Department’s number of new unemployment claims filed last week compared to the same week a year ago plummeted by 13%. After five years of misery and $10 trillion of failed government stimulus, cutting federal spending seems to be the formula for spurring private sector capitalism that is driving U.S. economic and employment gains.

In the September battle leading up to the federal government’s October 1st through the 16th shutdown, the president trotted out a string of influential supporters to warn about the dangers of restraining government spending. Nobel Laureate Paul Krugman lashed out in his New York Times column with “The Depressed Economy Is All About Austerity.” He added, “what we know and have learned about macro (economics) these past five years — and given the modest recovery that has taken place — we’re now at a point where … the depressed state of the economy is entirely due to destructive fiscal policy.” The International Monetary Fund warned “It is critical to remove the uncertainty created by the ‘fiscal cliff’ as well as promptly raise the debt ceiling,” and the San Francisco Federal Reserve Bank cautioned, “Over the next few years, as federal fiscal policy shifts toward austerity, it is likely to be a headwind against economic growth.”

Beginning in 2008, President Obama convinced America to go on an epic $6.5 trillion deficit spending spree and goaded the Federal Reserve to add $3.5 trillion in monetary stimulus. The justification behind this massive government intrusion into the American economy was to increase employment to offset the “lack of aggregate demand” from the private sector. The immense spending and cheap loans were supposed to go into what were called: “shovel ready jobs.” But then President Obama admitted famously that “there’s no such thing.” Krugman responded that it would have succeeded “had it been bigger.”

I do not want to understate the pain that over 19 million unemployed or those forced into part time employment face every day, but this is down by 4 million from over 23 million unemployed at the end of February 2013. According to the Wall Street Examiner, last week’s 273,411 newly filed unemployment claims was the lowest rate for the same week since March of 2007, at the 2007 peak of the five years of economic boom when it fell to 273,432.

The reason I believe this strength in employment has been invisible to both conservative and liberal pessimists is that the American economy is radically changing away from service industries as our nation is on track to regain its manufacturing base. Despite record low temperatures causing substantial transportation delays, February industrial production from factories and mines rose at a blistering 7.2% annualized rate. 

If you do not trust the federal government’s economic and employment reports, I suggest that you take a look at the one report that is absolutely reliable on a monthly basis, federal withholding tax data. This is the amount of cash deposited each month by employers as a percentage of their employee wages, salaries, commissions, and bonuses. From 0% growth at the bottom of the recession in 2009, the rate recently accelerated to a 7.5% year over year basis. 

If inflation is about 2.5%, this means that workers are now making real economic gains of 5% per year. In states like California, schools cut 90% of vocational training courses in favor of the Common Core skills required to work in the data processing and customer service industries. Consequently, with the economy’s strength in industrial production, it appears that skilled blue collar machine operators, welders, and technicians will continue to have wage power over their employers.

Congress, since the passage of the Budget Control Act of 2011, has either voted in unison against or just ignored President Obama last three budgets. As he presented his 2015 Budget Plan on March 4th he tied to revive deficit spending by stating, “As Democrats, we have a different idea of what the future looks like — an idea rooted in our conviction that our economy grows best not from the top down but from the middle out.” 

The president may still dream that the government is the “middle” of America, but Congress and the American people continue to demand austerity budgets to restrain federal spending. From an economist’s point of view, the government shutdown was a tipping point event that memorialized a coming long-term decline of government’s intrusion into the economy. Private sector businesses are now doing what capitalists always do when they see greater opportunities for prosperity; they ramp up hiring and production. America’s economic future looks bright!

The author welcomes feedback @ chriss@chrissstreetandcompany.com.

Chriss Street is teaching microeconomic at University of California, Irvine this spring from March 31 – June 8, 2014. Call Student Services at (949) 824-5414 or visit http://unex.uci.edu/courses to enroll!