Last Quarter's GDP Would Have Been Better Without Washington

Government took a big bite out of GDP growth last quarter. 

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Thursday's gross domestic product report was altogether positive, showing that the U.S. economy grew by 3.2 percent in the fourth quarter of 2013. Combined with the prior quarter's strong 4.1 percent growth, that could mean the U.S. economy had its best two quarters in nearly two years.

But it would have been even better without Washington.

[READ: GDP Grew by 3.2 Percent in Fourth Quarter]

The below chart shows government GDP readings for 2013 (blue bars), the federal government's contribution (red) and what GDP would have looked like if the federal government's contribution had been zero (green).



Over the course of 2013, the federal government subtracted from GDP growth in every quarter, including shaving nearly a full percentage point off of last quarter's GDP growth.

It has become much more common in the last three years for the federal government to subtract from, rather than boost, economic growth. The below graph shows the federal government's contribution to GDP growth over the last decade. During the last three years, the federal government has only contributed to GDP growth in two of 12 quarters. But in the prior seven years, government spending added to GDP growth in 22 of 28 quarters, as the below chart shows.



Exactly how troubling this is depends on one's philosophy of government spending and economic growth. Some conservatives, for example, have pushed for steep cuts to government spending in an effort to rein in deficits and long-term debt, arguing that doing so will create more growth and jobs.

Of course, many others (most Democrats, for example) do not hold this view. In addition, Ben Bernanke – the outgoing Federal Reserve chairman and a George W. Bush appointee – warned members of Congress in his many visits to Capitol Hill against sharp spending cuts during a fragile recovery.

"I think fiscal policy is focusing a bit too much on the short run and not enough on the long run," he told legislators in June, addressing the blunt sequestration spending cuts to federal spending in 2013.

[ALSO: Federal Reserve Continues Taper]

Last year, the government's effects on GDP growth were sizable, says one economist.

"The fiscal drag is quite important and was quite important in 2013 for a number of reasons," says Greg Daco, lead U.S. economist at Oxford Economics.

Daco cites sequestration and, to a lesser degree, the government shutdown as two ways government held back spending last year. He also points to expiring payroll tax cuts and higher tax rates for higher-income earners as government actions that hurt growth in 2013.

However, with the end of sequestration and the passage of a new budget bill, he sees some hope for a new trend in 2014.

"Going forward, I do expect less fiscal restraint, and I think that's going to be one of the underpinnings of the stronger U.S. economy in 2014," he says.

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