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Why Listening to Politicians Leads to Perceived False Economic Data

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Budget Cuts in 2011 Sign

One of the most well respected economics writers is David Leonhardt. His NY Times Economix blog is among the most well read and most non-political. This week, he clarified where the nation’s economy stands – and why it is as it exists. Rather than indulge in ideological talking points as so many politicians do, let’s deal in facts.

[O]ne of the major drags on growth has been the budget-cutting that has been going on at all levels of government for the past year and a half:

    The public sector has been shrinking for the last year and a half — mostly because of cuts in state and local government, with some federal cuts, especially to the military, playing a role as well. In the fourth quarter, government shrank at an annual rate of 4.5 percent.

    Over the last two years, the private sector grew at an average annual rate of 3.2 percent, while the government shrank at an annual rate of 1.4 percent.

    The combined result has been economic growth of 2.3 percent.

“The obvious conclusion seems to be that economic growth, and employment growth, would have been significantly stronger over the last two years without government cuts,” Leonhardt noted.

2011 Economy - Private Sector vs Public Sector Employment

As Leonhardt writes:

The private sector began to recover in 2009. The recovery slowed in 2010 and again in 2011, as the dips in the red line show. But by the end of last year, the private sector was expanding at a healthy 4.5 percent annualized pace.

Why, then, wasn’t economic growth in the most recent quarter better than the 2.8 percent that the Commerce Department reported today?

Because the economy is the combination of the private and public sectors. The public sector has been shrinking for the last year and a half — mostly because of cuts in state and local government, with some federal cuts, especially to the military, playing a role as well. In the fourth quarter, government shrank at an annual rate of 4.5 percent.

Over the last two years, the private sector grew at an average annual rate of 3.2 percent, while the government shrank at an annual rate of 1.4 percent.

The combined result has been economic growth of 2.3 percent.

As a result, when employment and economic data are used by politicos, one should remember that significant private sector employment gains, especially after a devastating financially caused recession as opposed to a business cycle recession, are being offset greatly by a significant loss in the public sector. Thus, no one should listen to politicians regarding economic conditions without seeking politically independent, expert data.

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Written by Valerie Curl

February 3, 2012 at 9:25 AM

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