International Monetary Fund (IMF) Director Christine Lagarde has called on Congress to “repeal the sequester” because she says “the effect of the sequester and deficit reduction more generally are already affecting the economy.”
Lagarde claimed that the budget cuts would “shave 1.25 to 1.75 percentage points of growth.”
She left out the most important part, however. The reason is because government spending is included in the measure of the Gross Domestic Product (GDP).
Americans for Limited Government (ALG) President Nathan Mehrens called Lagarde’s comment “simultaneously accurate and yet misleading.”
The fact is, if one excludes government spending from the Bureau of Economic Analysis’ first quarter GDP estimate of 2.4 percent annualized real growth, the growth of the private sector — i.e. the real economy — jumps to a 4.1 percent rate of increase.
“This is a bias of the first order in favor of government spending, because when government grows faster than the private sector, it appears to boost GDP and when spending is reduced, GDP appears to slow down. This is an illusion,” Mehrens explained.
A broader ALG study has found little correlation between government spending and nominal private sector growth, particularly immediately after World War II, when spending dramatically decreased.
In 1945, government spending at all levels contracted nominally by 11.7 percent, but the private sector increased by 13.4 percent.
In 1946, as the war ended, spending dropped 57.4 percent, yet the private sector grew 40.5 percent.
Same thing in 1947. Spending dropped by 8.3 percent, and yet the private sector grew nominally by 13.8 percent.
More recently, in 2011, government expenditures only grew 0.08 percent, but the private sector grew nominally by 5.02 percent in 2011, faster than the prior year’s 3.9 percent. In 2012, spending only grew 0.1 percent, but the private sector nominally expanded by 5.04 percent.
Makes one wonder why government ever included government spending as a component of GDP in the first place. Simon Kuznets, who in his 1934 report “Report on National Income” to Congress developed the framework for measuring GDP, justified the approach by writing “purely governmental functions are of real value in the economic life of the nation, and that they give rise to income which should be taken into account.”
But now we know that while rising government employee incomes is measurable, there appears to be little evidence it boosts the real economy.
Yet, by this flawed measure, the IMF’s Lagarde would presume to know the proper level of fiscal adjustment in the U.S. She has no idea, precisely because she has failed to observe any causal relationship between government spending cuts on the real economy.
The only thing she has proven is that by cutting government spending, a measure of government spending — in this case, GDP — decreases. Whoop-tee-doo.
In the meantime, this is not the first time the IMF has chosen to interfere with U.S. politics. Recently, it called on the U.S., its largest contributor, to levy a $500 billion a year carbon tax on consumers to offset what it called “underpriced” oil, coal, and other energy products.
This “mispricing” is supposedly leading to “excessive energy consumption,” which is “accelerating the depletion of natural resources” and contributing to climate change.
The Jan. 28 IMF study stated, “Consumer subsidies include two components: a pre-tax subsidy (if the price paid by firms and households is below supply and distribution costs) and a tax subsidy (if taxes are below their efficient level).”
The study justifies these taxes as preventing climate change: “The efficient taxation of energy further requires corrective taxes to capture negative environmental and other externalities due to energy use (such as global warming and local pollution).”
In a March 27 interview, the IMF’s head of fiscal affairs, Carlo Cottarelli said, “Even where countries impose taxes on energy, they’re rarely high enough to account for all of the adverse effects of excessive energy consumption, including on the environment.”
Cottarelli claimed that not taxing carbon emissions in the U.S. by $500 billion a year “crowd[s] out public spending that can boost growth, including on infrastructure, education, and health care. Cheap energy can also lead to overconsumption of energy, which aggravates environmental problems, such as pollution and climate change.”
The IMF’s interference with sovereignty does not end there, as even a casual look at the recent European sovereign debt crisis shows. Countries currently implementing IMF programs, like Greece, have done so not for their own benefit, but to prop up the Euro currency.
Meanwhile, Greece’s surrender to international fiscal authorities has all but destroyed its economy — with 27.4 percent unemployment and GDP shrinking by more than 5 percent. The nation would have been unquestionably better off simply leaving the Euro and working out a new payment plan with its creditors on its own.
Something to remember as the nation considers any more “helpful” advice from the IMF, which wants the U.S. to double its quota subscription with the international agency by $65 billion. As ALG’s Mehrens noted, “If anything, this is just one more reason the U.S. should defund the IMF in full.”
Robert Romano is the Senior Editor of Americans for Limited Government.
