First, the ugly news: the government has been a big drag on the economy for a few years now. And now the better news: that appears to be over. New data from the Brookings Institution shows that the public sector’s impact on the economy finally seems to be turning positive again.
The government has finally stopped sabotaging the economy
The below chart (hat tip to David Wessel) is a look at a fiscal impact index that Brookings has created to show government’s effects on the economy via spending, taxes, and transfers. It shows that finally, in the last quarter, the government has stopped pulling economic growth downward.
Source: Brookings Institution
Brookings estimates that via sequestration and tight restrictions on spending, as well as the end of the payroll tax cut and extended unemployment benefits, the federal government subtracted a full percentage point from GDP growth each year from 2011 to 2013, Brookings estimates. That may not sound like much, but when it comes to GDP growth, that’s huge. Consider that growth was only 2.2 percent in 2013, 2.3 in 2012, and 1.6 in 2011. Those are all tepid speeds. Another percentage point would have made economic growth almost 50 percent faster last year.
All that might be over, but it’s not like the public sector is about to start spending (or tax-cutting) the economy back to life anytime soon. Federal spending will be flat for the next year, Brookings notes, and government will altogether be a “neutral” factor in economic growth in the coming months. Better no effect than a negative one, after all.
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