- The Washington Times - Thursday, April 28, 2011

Growth in the U.S. economy slowed sharply to a 1.8 percent pace in the winter quarter from 3.1 percent at the end of last year as budget cuts at all levels of government and a surge in oil prices weighed on the economy, the Commerce Department reported Thursday.

The jump in oil prices to more than $100 a barrel, and soaring prices for corn, wheat and other commodities, caused a near doubling of the inflation rate to 3.8 percent from 2.1 percent in the fourth quarter of 2010. That meant that consumers had less spending power, causing their contribution to economic growth to decline to 2.7 percent from 4 percent.

“Sharply higher gasoline and food prices are taking a toll on growth,” said Sam Bullard, a senior economist at Wells Fargo Securities. He said that caused consumers to backpedal after they fueled robust spending growth at the end of last year.

”Retail gasoline prices have risen roughly 85 cents since the start of the year, while food prices were up an annualized 7.5 percent” during the quarter, he said. Still, “consumer spending held up reasonably well despite those challenges.”

While consumers and businesses got zapped by higher inflation, governments faced with unsupportable debts at every level slashed spending.

The collective drop of 5.2 percent in government spending was the largest since 1983, provoking a lively political debate about the role government spending plays in the economy.

Republicans such as Rep. Tom Price of Georgia, the House Republican Policy Committee chairman, continued to call for more spending cuts, insisting that they will help the economy by spurring faster growth in the private sector. But Democrats and liberal groups said the report shows that cutting spending too fast will throttle the economic recovery.

Federal Reserve Chairman Ben S. Bernanke tends to view government spending as a stimulus for the economy, but he and other economists also warn about the danger of too much spending and debt.

Christian Proano, assistant professor of economics at the Schwartz Economic Policy Center, said “it is undeniable” that governments need to pare down sovereign debts, which collectively total nearly 95 percent of economic output  a level deemed dangerous in economic circles.

“However, an overly hasty reversal of the U.S. fiscal stance based primarily on government spending cuts could be counterproductive given the fragile situation of the U.S. economy,” he said.

Thursday’s report clearly showed that governments at all levels are increasingly constrained by mounting debt. The public sector overall emerged forcefully during the first quarter as a dead weight on growth after helping to support the economy during most of the Great Recession and early recovery period.

The federal government axed defense spending by 11.7 percent  nearly six times the decrease seen at the end of 2010. State and local spending fell by 3.3 percent after dropping 2.6 percent in the fourth quarter.

Wells Fargo’s Mr. Bullard said the drag from government budget cuts was significant and should continue for some time “as officials are forced to continue to make difficult decisions in terms of spending cuts and tax increases to bring deficits under control.”

States and local governments have been in a retrenchment mode for more than a year. But while the drop in federal defense spending was eye-popping, analysts say overall that the federal government is not acting to reduce growth because generous tax cuts enacted in December are offsetting recent spending cuts.

“Overall federal fiscal policy is roughly neutral for growth, with the payroll tax cut and extended unemployment insurance benefits offsetting the drag from the winding down of stimulus spending,” said Augustine Faucher, an economist at Moody’s Analytics.

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