Goldman’s Alec Phillips is out with a clever note on the connection between government gridlock and growth.
Now the first thing to note is that contrary to some popular delusions, which posit that the government is only pumping more and more into the economy, in the last quarter, government spending was a net drag on growth, as stimulus fades, and austerity starts to kick in.
But the spending cut was more than expected, and Phillips posits that it’s the result of gridlock in DC. More specifically, he argues that it’s the ongoing result of funding mechanisms called “continuing resolutions” which are the temporary stopgap measures that Congress uses to keep the government operating in the absence of a full-year budget deal.
Why do these temporary stopgaps crimp total spending?
The first category of funding–so-called “interim CRs”–appear to depress federal activity, through two mechanisms: first, increased uncertainty may lead agencies to delay spending in order to conserve resources to avoid depleting funds too early. The second possible cause is that some CRs include specific prohibitions on new projects or investments from being undertaken, which can affect hiring and procurement. (These and other effects are detailed in various government reports, including for example “Interim Continuing Resolutions (CRs): Potential Impacts on Agency Operations,” Clinton T. Brass, Congressional Research Service, October 14, 2011)
Anyway, he goes through more explanation, but the key thing is that the data seems to bear it out.
Check out the relationship between the government’s net contribution to growth and periods when we’re operating under a CR.
Photo: Goldman Sachs