Tags: GDP | defense | spending | cut

A $47 Billion Budget Cut Causes Economy to Contract

By Michael Carr   |   Friday, 01 Feb 2013 07:44 AM

Unexpectedly, the economy contracted in the fourth quarter of 2012 and the reason, according to many analysts, was a $46.5 billion cut in defense spending. This doesn’t sound like much in a $13.6 trillion economy, but it shows the reality of runaway government spending.

Consumer spending increased and other measures of the private sector also showed improvements. Government spending was the reason for the reported contraction and that drop was the result of a decline in consumables purchased for defense.
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Defense spending should have declined since this was the first quarter after troop levels were reduced in Afghanistan. In September 2012, the last of 33,000 surge troops left that country and the smaller number of troops should have required less spending on consumables.

Consumption expenses should also have been temporarily inflated in the third quarter as the Department of Defense sent aircraft and ships to bring the troops and equipment home. Defense spending rose by $27 billion that quarter. The fourth quarter would then represent the right level of spending given the new force structure.

This news highlights a problem for the country.

Government spending is bloated and unsustainably high. Cuts are needed in order for the nation to survive in the long term. In the short term, those cuts will be counted as reductions in the gross domestic product. This reality makes it possible for Democrats to say that budget cutting will have disastrous consequences.

The fourth-quarter data show the private sector can prosper even when the economy is contracting, as long as the contraction is caused by reducing government’s drag on the economy.

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