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Idea of the Day: Political Conflict over U.S. Fiscal Policy Is Hurting the Economy

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Yesterday’s release of U.S. economic growth numbers from the Bureau of Economic Analysis show the toll that the political conflict over the nation’s fiscal policy is taking on the economy. The U.S. economy contracted by 0.1 percent in the last quarter of 2012, putting the United States on the precipice of recession. The economy most certainly would have grown at a faster rate were it not for the ongoing political brinksmanship over the debt ceiling and the risk of sharp fiscal contraction in the form of the pending automatic “sequestration” budget cuts.

That feared contraction is now unfolding with the automatic across-the-board spending cuts due to go into effect on March 1. And we know what will happen if policymakers don’t work to scrap the so-called sequester: Economic growth and job creation this year and in the future will be slower than it needs to be. The “advance estimate” of the economic growth numbers we see today is often revised up slightly in the following months as better information becomes available. Nonetheless today’s shocking economic shrinkage should serve as a wake-up call for politicians to get off the fiscal contraction path and on a path that secures the recovery and lays a foundation of public investments for long-term economic growth.

The nation’s gross domestic product, or GDP—the sum total of goods and services produced by workers and capital in the United States—continued growing but at a slowing pace as 2012 drew to a close. The growth rate slowed 3.1 percent from the previous quarter and registered the first negative growth since June 2009. We can better understand how different parts of the economy are faring by looking at GDP’s constituent parts: consumption by households; investments in productive equipment and housing; exports and imports; and the government’s fiscal policy. For the economy to grow overall, all of these parts of the economy must grow in net.

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This is part of a regular column: Idea of the Day

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