Proof that cutting government slows the economy

>>> do you think government spending is the big problem, the thing that is really holding the economy back? if so then you had a bad week.

>> first jobs report of the year.

>> fourth quarter gdp numbers are down.

>> the republican party can't move forward.

>> government spending does actually help the economy.

>> a trillion dollar stimulus bill, supposed to create jobs.

>> we need to start solving the actual problem.

>> we need to cut spending.

>> cutting.

>> cutting very popular social insurance programs. medicaid, medicare, social security , health care .

>> there is another economic reason why we need reform.

>> let's help to build the greatest economic engine the world has ever known.

>> as congress gets ready to tackle the immigration, there will be a snag.

>> the republican party can't move forward.

>> doesn't want to do anything on comprehensive immigration reform .

>> what would you do about immigration?

>> how to deal with border security .

>> first we strengthen the borders.

>> they have to be reasonable how they do it.

>> we define ourselves as a nation of immigrants.

>> the economy is back in the spotlight.

>> government does help the economy.

>> it keeps our country on the cutting edge .

>> helping us grow our economy and strengthen our middle class .

>> your economic theory , your theory of what is holding the american economy back. if that theory is we have just way too much government spending and way too high taxes and if we would just cut that spending and we would have that big recovery, if that is your theory, and it is pretty much the major theory of the political party this week, then you had a bad week. we got two pieces of bad news, one was bad, one good. one was the economy shrunk in the first quarter of 2012 . that is the bad news, the other is that the economy added 157,000 jobs in january. but, and this is actually even more important, it added 127,000 more jobs than we thought in november and december. so altogether, today's jobs report added more than 280,000 jobs. 280,000 to the economy. that is pretty good. but it was what those reports said about the debate we are having in washington that was really interesting. when we measure economic growth , we're not measuring all that many things. it is only four main things, at least in category, there is consumer spending , what you and i buy. there is investment, so factoring in getting a new machine, that was very slightly down. there is trade, the stuff we export, minus the stuff we import. that is a bit down. and government spending , all levels, state, local, federal. way down. the economy didn't the fourth quarter, onl y a tenth of 1%. but almost all of it came from the government cutting back, mostly because of cuts in defense spending . if government spending simply had not changed, the economy wouldn't have shrank at all. there is a lesson here, austerity has been hurting obama 's economy, for the last four years. government spending has gone down in ten of the last 12 quarters. under ronald reagan and george w. bush you will find this part of economic growth and spending is pretty much all growing under the two republicans. you can see it under the graph. under reagan, it added in his first term a bit more than 6/10th of a percentage point, under bush, about half a point. under obama , it has been negative. if obama is a socialist he is terrible at it. here is the interesting thing, if the economy is shrinking because the economy is shrink, we now added new jobs, almost 200,000 jobs in december. and we added more than 150,000 jobs in january. what is amazing about this, this period was fiscal cliff element, it was what everybody was saying the economy really needed was deficit reduction. and this is a period in which we didn't come to a big deficit reduction deal. what we did is raise taxes. it cut the deficit a bit, but not a big deal . what happened to the markets? somehow we kept adding jobs and the stock market did really well. it all worked out reasonably okay. so here is what we learned. cutting government spending hurts economic growth . no doubt about it. that means doing it in a bad economy may not be such a good idea. but increasing taxes a bit, not coming to the big deficit deal. the private sector and even the markets don't seem all that concerned. the last week should cause a lot of people in washington to re-think what they're doing. i am not optimistic that will happen. joining me now, former economic adviser to vice president joe biden , jared bernstein, a man who is always re-thinking what he is doing, how are you?

>> i'm fine, ezra.

>> and what else did you see in the reports? you got a good eye, what caught yours?

>> one thing i saw was the revisions to last year's employment growth was such that i thought we were adding 150,000 jobs a month in 2012 . i thought it was okay. turns out we're adding 180,000 jobs per month last year. so we did a bit better. over 2 million jobs on the year. now on the gdp side, most economists, don't think it will stick. i think it it volatility, i think there were unusual things that happened. in the quarter to quarter changes, it is better to look year over year.

>> and do you mean what happens in a month or two we'll get the updated numbers and it will say we grew by .4 or something?

>> that is what i'm saying --

>> the initial measures are usually off by 1.3%, they're all preliminary.

>> i go year to year, 1.5% is the gdp growth year to year. now if gdp is growing around 1.5%, which i think it probably is, that is probably too slow to really knock the unemployment rate down which is what we really need. and kind of like what you said in your introduction, there are good numbers out there but the unemployment rate is stuck at 8%.

>> and there is a lot more pain coming from the government, some of it, the spending cut? the payroll tax cut this year will be a big hit . but also we have a lot of people really think the sequester will happen. so these kinds of defense cuts which we were seeing, which were maybe a bit of an aberration, fourth quarter, could become more normalized. so that could be a big hit . we keep weighing it down in washington .

>> what i took from your introduction is not that the defense cuts in the fourth quarter are necessarily going to stick, as we both said, they were somewhat anomalous. but if it is not back where we need it to be, guess what happens? the economy grows more slowly. government is a significant part of the economy. and if we learned anything, which you suggest we haven't, if we were going to learn from this, what we would learn is in fact you cut the government spending at a time like this you're going to grow more slowly. now the sequester threatens $85 billion of cuts in 2013 . and most estimates are that could take another half of a percentage point off of gdp . like i said, if we're growing at somewhere around 1.2% we can't afford that. why is the market -- the dow hit 14,000 today, doing very, very well.

>> i think i can explain it.

>> explain it, enlighten me.

>> so far, we have been talking exclusively about the united states . although i did mention austerity and europe. but corporate profitability is doing well. well, if you're a multi-national corporation that can sell into developing economies in asia, for example, then your profitability doesn't depend on the united states getting it right. it doesn't depend on the congress rejecting austerity. what it does is go where there is growth.

>> jared bernstein, who makes many good points, thank you for joining us.

>>> if you are not around here but watched chuck hagel 's confirmation hearing you probably thought the defense secretary was in charge of israel or the surge. but he is not. he is in charge of much more important things, chuck