GDP wasn’t that bad – but Republican austerity plans are

>>> moments ago the debt ceiling compromise passed the senate. that's a fiscal crisis temporarily averted. it comes just a day after we learn that gdp , that's the mesh shush of how well our economy is performing, contracted by 0.1%. here is how some of the financial media covered it. quote, the best looking contraction in gdp you will ever see. and, quote, don't freak out about gdp . so what's going on here? less government spending happened. primarily in defense. that overshadowed more spending on the part of consumers and businesses, which is what these reporters were actually looking at. for more we go to jared bernstein a senior fellow on the center of budget and policy priorities and jonathan capehart a political opinion writer for "the washington post ." welcome to both of you.

>> thanks, karen.

>> okay, know i like to come to you with these kinds of things. say what? it's good but it's bad? explain that one to me.

>> well, sure. i mean, i already knew we were growing slowly. in fact, i'd say too slowly. i didn't think the economy was actually contracting before yesterday's report for the fourth quarter of last year. and i still don't think it's contracting. i think there were anomalies in this report. you mentioned the defense spending . there may have -- that may have something to do with looming sequestration if defense department officials decide we're not going to take on a new investment because we may be facing another $45 billion in cuts this year. the inventory accumulation, i don't want our listeners to start changing channels.

>> i was going to say watch out.

>> sorry. that's very volatile. my point is this, if you look at the year-over-year measure of gdp growth which is good to do in a situation like this, 1.5%. now, that's below trend and it's too slow to really knock the unemployment rate down, which is what we want. we're not doing enough in the economy, but neither are we in recession.

>> okay. if you understood that, great. here is what i understand in terms of the politics. we're seeing republicans though sort of suggesting that perhaps they can use this against the president because this gdp number kind of gives them some leverage. obviously we're going into sequestration and a whole host of fun fiscal talks, yes?

>> sure. they've been doing it. this has been their line of argument. the thing i find very interesting here is so the contraction in gdp was because of contractions in defense spending , but it makes me think of the republican line is government is too big. government has to cut spending. we've got to cut spending. and so if this is what happens with, you know, defense spending on the government's part, then what does it mean for all the things that wall ryan and other republicans are demanding of the federal government ? what will that -- what kind of impact will that have on economic growth ? they're not talking about cutting defense. they're talking about cutting programs and government spending in areas that are just not programs. they deal with people. if those folks lose their jobs that just happen to be in the government, which means they then can't spend their paychecks in communities which has a ripple effect, but i leave it to the economist.

>> there's two di mentions to what jonathan was just saying. first of all, you're right, when you start cutting too deeply, particularly in the nondefense side of the budget, you're going to start hurting people. and, in fact, we've already done that and we're going to do more if we don't stop. but secondly, i have heard this incredible non sequitur come out of yesterday's gdp report, which is government was a drag on gdp growth because of less defense spending . therefore, we have to cut government spending . that makes absolutely no sense. that right there is the austerity calculation and it's backwards.

>> jared , i want to ask you about that because, i mean, it seems to me this is the broad conversation we're having. austerity versus investment. we have talked about the fact that in europe, where they were pushing austerity, now they're suggesting that that wasn't probably a very good idea. here at home as we're having this conversation, what gives us evidence in terms of this pushback that we need to not do more austerity but actually look for the way that is we need to actually make investments?

>> i thought that the report yesterday was a good microcosm. what i was trying to say is we are growing too slowly. we're not contracting. we're clearly growing too slowly. government is now about 23% of the economy. it's a critical component, especially when the private sector is still kind of weak. so what we need to be thinking of now is not so much near-term deficit reduction but near-term jobs measures to help gave this nascent recovery more of a boost or we will see more reports that look like the one yesterday. the evidence for austerity is very, very negative, very clear.

>> jonathan , we've seen positive signs in domestic auto sales and the housing market , but one of the arguments we've been making is that the short-term fixes like today that was voted on today, this sort of lurching from three-month agreement to two-month agreement to however long agreement they can get, that that actually also erodes confidence and frankly the markets don't seem to like that.

>> no, they don't. and while, yes, you get a short-term benefit by putting off this sort of doomsday armageddon discussion until may, but again people shouldn't underestimate the need and desire on the part of business people of wall street to have some kind of certainty. wall street probably couldn't care less what washington does with the debt ceiling and cuts and things like that as long as they know what washington will be doing over the next 12 months, 24 months, and this is pie in the sky , it will never happen, 36 months.

>> how about that? so, jared , mitch mcconnell was on the floor of the senate on wednesday, and he said it's actually not new revenue that we need, that it's cutting government waste as we've been talking about.

>> right.

>> let's listen to a few highlights.

>> -- on pig manure. if they demand a one or fun ratio between tax increases and pig manure cuts, then there's really no hope of ever putting our country back on the path to prosperity.

>> now, start with you, jared . correct me if i'm wrong, but isn't pig mature what paul ryan is actually trying to cut entitlements unless that's their word for entitlements?

>> you know, there is no line in the government budget for waste, fraud, and abuse, although these guys pretend there is. when they talk about things like that, they don't know what they're talking about. during the recovery act people were attacking scientific research based on it having to do with something like ants or grasshoppers. turns out it was cancer research . this is blowing smoke. we've cut $1.5 trillion in spending over the next ten years. any further deficit reduction going forward has to be balanced. the theme of our whole conversation so far is that this is not the time to focus on the deficit in the near term. it's jobs.

>> all right. jared bernstein and jonathan capehart, thank you so much.