Don't Get Suckered Into The "Austerity" Argument

“Recovery Shows a Soft Spot,” declared a banner headline of a recent edition of the Wall Street Journal. “Soft spot” pretty much sums up the Journal’s explanation for a reported 0.1% contraction in gross domestic product (GDP) in the fourth quarter of 2012.

Viewing things from further west on 8th Avenue and 41st Street, The New York Times spun the same story differently, toward its chronic, Krugman-esque view of trickle-down government. The Times encapsulated the tale of a 0.1% GDP decline in a front-page headline, declaring that “Growth Halted in 4th Quarter on U.S. Cuts.”

Which angle should you trust? How about neither! Instead, let’s take our own look behind the curtain…

U.S. cuts? Huh? What cuts? Has Congress cut spending and not told anyone? Are fewer people receiving lower entitlement payouts? Do we have fewer people on Social Security? Fewer on food stamps? Less Medicare? Are government agencies laying off personnel down in Washington? Are we shutting off military aid to, say, Egypt?

Cuts? What is The New York Times talking about? Has U.K. Prime Minister David Cameron secretly been advising President Obama and setting U.S. spending policy? Nope.

Digging into details of the Q4 contraction, the key component is a 22.5% decline in military spending at the end of last year. Other than that, business spending, consumer spending and housing were all slightly positive. In other words, the civilian economy muddled along and did OK — but not great — during the last three months of 2012.

The Department of Defense (DOD), however, tightened the screws. Procurement officers and defense contractors, up and down the supply chain, cut back outlays, anticipating the fiscal cliff originally scheduled to kick in on Jan. 1, but now rescheduled to March 1. (In this sense, el precipicio still looms for DOD.)

The bottom line is that the private U.S. economy is holding its own. Businesses and consumers are writing checks. Autos are doing OK. Technology is holding up well — Apple’s loss is Samsung’s gain. Housing is moving — depending on location, location and location, of course.

Economywise across the U.S., things are not super-hot, by any means. There’s plenty of room for things to get better. (Or not, perhaps. Taxes are up this month. Obamacare looms.) Still, the private economy is not evidently throttling back.

But down at the Pentagon? Times are tough. Purse strings are tight. Here’s an example. In mid-January, the French government requested U.S. aerial tankers to assist with that nation’s military expedition into Mali. The first reaction from the U.S. side was to ask who was going to pay for the fuel. In the olden days, in case you don’t know, the tankers would fly first and the accountants would settle up for the gas later on. No longer, apparently.

Don’t Be Fooled by Raw Numbers

Why dwell on the New York Times “U.S. Cuts” headline? It’s part of the run-of-the-mill, Times style of journalism, right? (Yes, right! It’s their headline, not mine.)

Well, I don’t want you to get suckered into the “austerity” argument that we frequently see in the Times, in both the news and opinion sections. That austerity idea is geared to championing government spending as a creator of domestic prosperity.

Indeed, according to the logic embodied in the Times’ analysis, the American economy is now contracting — despite the business, consumer, auto, tech and housing sectors — because we’re not shoveling enough money into our big, gray military machine.

The counterargument is that this isn’t the 1930s, when the feds spent immense sums to pump the economy. Back then, massive projects built, say, the Hoover Dam, Grand Coulee Dam or Tennessee Valley Authority (TVA) dams. And at least when these capital projects were completed, the country had a bunch of dams, impounding water and generating electric power.

So in the 1930s, the feds spent big money on concrete and steel. That’s unlike today, when the bulk of federal spending, and its seemingly endless growth, goes for income redistribution, entitlements like Medicare and salaries to bureaucrats — none of whom are building dams.

The takeaway point is don’t confuse raw GDP numbers with the “real” economy. GDP is simply a metric that people use to gauge the size of the U.S. economy. But GDP is NOT the actual U.S. economy. If GDP really contracted by 0.1% in Q4, did the “real” economy decline too?

For example, what if we moved the GDP numbers around? What if the government were spending immense sums on military procurement, while, say, private investment were totally stalled? By cooking the macro-books just a little bit, government spending could appear to show that GDP is strong, and growing. Yet in reality, lacking private investment, the overall economy would be much worse.

Back in the USSR

An example of these fake economics would be the former Soviet Union, with its massive, government-directed capital investment, year after year, in heavy industry and military production. Sure, Soviet capex numbers looked strong, but the economy was hollow.

When I was in Moscow a while back, I had a long talk with a Russian economist trained in the Soviet era. Her view was that basically, Communism was a system of false bookkeeping.

Soviet planners made countless bad investments, which never paid off to the nation. But politics within the Soviet system prevented the overall economy from ever truly booking the loss, because every expenditure showed up in the books as a positive element to the economy.

Now looking back, the landscape of Russia and former Soviet states is littered with white-elephant projects that never had any economic justification — roads to nowhere, bridges to nowhere, factories in the middle of nowhere.

The Russian economist summed up 75 years of history by saying, “Communism died in the USSR by the early 1970s, but political inertia kept it going. Communism outlived itself, until everything collapsed suddenly in 1991.”

A Different Story (For Some)

Today, though, the story has changed. “Putin Turns Black Gold to Bullion as Russia Outbuys World” cries a headline from Bloomberg. In a way only history can, the storyline is changing. Russia’s economy is gearing up as Vladimir Putin stresses the need for energy and hard currency.

Russia is stocking up on gold? At a time when the U.S. is cooking the GDP numbers one way or another? What does Vlad know that Obama, Biden, Geithner, Bernanke, Reid, Pelosi…And most politicians don’t? Probably, a lot.

Indeed, don’t be fooled by the U.S. austerity talk. So far nothing behind the government curtain has changed.

Likewise, let’s not change our thesis on holding hard assets. Keep an eye on gold, silver, oil and all the other “stuff” that can hold more value than government paper.

Thanks for reading.

Byron King

Original article posted on Daily Resource Hunter