WHAT SHUTDOWN ? / THE WALL STREET JOURNAL REVIEW & OUTLOOK

Review & Outlook

What Shutdown?

The GDP and job reports show the private economy and hiring aren't hurt by spending cuts.

Nov. 8, 2013 6:22 p.m. ET

 

 

This week's big economic reports—October jobs and third-quarter GDP—reveal an economy that continues to plod along. At least it's growing and creating some new jobs, but growth remains too slow to lift incomes for most Americans.

The reports highlight two points that deserve more attention. The first is how little the private economy was damaged by the government shutdown. The Bureau of Labor Statistics reported no major impact from the shutdown on hiring by private employers, who added 212,000 jobs. Washington views itself as the main driver of growth, but the opposite is closer to the truth. The shutdown underscored how much of the government could go away with little impact on growth.

Slow growth also can't be blamed on the budget caps and automatic sequester budget cuts. The Commerce Department's national economic accounts have a Keynesian bias that treats government spending as a net positive for GDP and a cut in spending as a negative. Yet the economy grew by 2.8% in the third quarter despite the shutdown and decline in overall government spending. So much for the negative growth "multiplier" effect from spending cuts that is built into Keynesian economic models.
Even on Keynesian terms, government spending was a net positive (+0.04%) contributor to third-quarter GDP because the modest decline in federal spending was offset by a larger increase in state and local spending. Government overall lost a mere 8,000 jobs in October. Our view is that the current overall reduction in federal spending is healthy for the economy because it contributes to lower borrowing costs and makes future tax increases less likely.

A more troubling theme in the latest economic data is the decline in business investment. More than a third of the 2.8% growth rate came from businesses building up inventories. Unless companies can find more demand for their products in the coming months, these inventories will have to be worked down and growth in future quarters will be slower.

Business investment—in factories, equipment and the like—slumped to a disappointing 1.6% increase in the third quarter. Economist David Malpass looked at the numbers and found that, "On a year-over-year basis, growth in business investment has slowed to 2.7%, down from a 10.4% [year-over-year] rate in the first quarter of 2012 and a 6% average real growth rate from 2003-2007."

Could it be that this 2013 investment slowdown is related to the big investment tax increase that President Obama imposed in January? Just asking. The tax increase reduced the net profit of small business and the return on capital gains and dividends from business investments. When you tax something more, you get less of it.

We can't recall a President who has talked more about the need to increase investment but done so little to promote it. Perhaps that's because he defines investment mainly as something government does. But without more private investment, you can't lift productivity and worker incomes. Average hourly earnings rose only two pennies in October to $24.10, and they're up by only 2.2% for the year—barely ahead of inflation.

Perhaps the pickup in October hiring is a hint of faster growth to come. At least Washington, with its current legislative gridlock, is doing less active harm. A year delay or more in the unfolding debacle of ObamaCare would help even more.

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