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Government spending at fault for bleak economic outlook

Raymond Keating

Raymond Keating

In its latest economic outlook, the Organization for Economic Cooperation and Development projects further economic underperformance in the U.S. and other developing nations. While the global economy is “gaining momentum,” the OECD warns “the recovery is fragile, extremely uneven across different regions.

The group forecasts Europe will barely grow at 0.1 percent in 2012 and 0.9 percent in 2013. Meanwhile in the U.S., the OECD forecasts that gross domestic product will grow at 2.4 percent in 2012 and 2.6 percent in 2013.

It’s crucial to remember real GDP growth during economic recoveries in the U.S. should top 4 percent. Even counting periods of recession, real annual GDP growth has averaged 3.3 percent post-World War II. So, if the OECD is right, the underperforming recovery is expected to labor on for the foreseeable future.

Where is the uncertainty in the OECD outlook? It’s stated in the report: “Risks around the projection are extensive and predominantly on the downside … .”

And what is the key downside risk? According to OECD Chief Economist Pier Carlo Padoan: “The crisis in the eurozone remains the single biggest downside risk facing the global outlook.”

The report’s accompanying statement explained: “In Europe, business and household confidence is weak, financial markets are tight and the adverse impacts of fiscal consolidation on near-term growth may be significant, particularly in countries hardest hit by the euro crisis … . Recovery in the healthier economies, while welcome, is not strong enough to offset flat or negative growth elsewhere in Europe … . The OECD warns that failure to act today could lead to a worsening of the European crisis and spillovers beyond the euro area, with serious consequences for the global economy.”

There’s no doubt Europe is a mess, is having negative effects on other economies and threatens to further damage global growth. But it’s also critical to acknowledge European leaders don’t seem all that interested in dealing with the key issue restraining growth and generating debt woes — the size of government. Among the 27 European Union nations, government spending sucked up nearly half of GDP in 2011. That’s a growth-strangling level of government. Until the size of government is reined in, Europe will remain, at best, a slow-growth economy.

In the U.S., the same basic issue restrains growth. Federal, state and local government spending as a share of GDP hit 36.5 percent in 2009 and 35 percent in 2010. Such levels previously haven’t been reached in the post-World War II era. Compare those levels to 28.8 percent in 2000 and 30.9 percent as recently as 2007.  Throw into the U.S. mix increased taxes, more regulation, a lack of leadership on trade and misguided monetary policy, and a deep recession and underperforming recovery aren’t surprising.

No reason exists why the U.S. shouldn’t be leading the global economy and taking others along with us to higher levels of growth — other than the fact all the wrong policy moves have been made for the past four years.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. Reach him through the Web site at www.sbecouncil.org.
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Posted by on Jun 12 2012. Filed under Opinion. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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