What made the US economy shrink? The fiscal cliff fight in Congress is what

http://www.guardian.co.uk/commentisfree/2013/jan/30/us-economy-gdp-shrink-congress-fiscal-cliff

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Washington's inane fight over the fiscal cliff late last year wasn't just harmless talk. It created actual damage. We now have what looks like proof that Washington's petty attempt to take the US economic system hostage in the "fiscal cliff" fight actually <em>did hurt the economy</em> by causing businesses to cut back and brace themselves for impending disaster.

US gross domestic product shrank by a small amount, 0.1%, in the last three months of 2012. While the number is small, the symbolism is huge. It was the first time in three and a half years that US GDP shrank – and shrinking GDP is feared by economists because it can be the first sign of an impending recession. Even worse, the contraction caught most experts by surprise: the consensus among economists called for at least 1% growth.

Worse yet, it was not a gradual reversal. This was a sudden and vicious chop. GDP had actually grown by 3.1% in the third quarter, according to the Commerce Department. That makes the drop even more severe: those three percentage points are very valuable in an economy that's barely stumbling out of the recession of 2008-2009.

So, what happened?

Washington's idiotic battle over the fiscal cliff is what. The automatic tax hikes and government spending cuts set to go into motion would have hurt a wide swath of American people. CEOs were particularly loud about the need for Washington to come to some kind of decision. Still, despite the pleading and the obvious economic harm implied in letting the fight go to the eleventh hour and beyond, lawmakers refused to get their acts together enough to address the fiscal cliff.

The result was that, as fear took over, the front lines of the economy suffered: businesses pulled back. They accumulated less in their inventories, which may have cut as much as 1.3 percentage points from growth, according to IHS Global Insights. Defense spending – which would have been gutted by $500bn in the fiscal cliff – "plunged 22.2%, subtracting 1.3 percentage points from growth," IHS wrote.

Consumers, who were largely unaware of the fiscal cliff, continued to spend. Only that kept the GDP result from being a total disaster.

This should serve as a lesson to Washington to stop any more stupid manufactured crises. There is no reason that grown men and women, sworn to serve the US, should torpedo its economy in a petty refusal to negotiate over vital economic issues. The fiscal cliff fight was a notable failure on the part of the nation's lawmakers.

There may be more ahead: even though Congress came to a last-minute deal on New Year's Day, it wasn't a real agreement. All it did was put off the decisions on the spending cuts and tax hikes for a few more months.

Some economists are still optimistic that this month's GDP number is not indicative of the way the economy is really going. Many other economic measures, including housing and unemployment, signal further recovery. But consumers will still suffer from the effect of the fiscal cliff tax hikes. According to Nigel Gault, chief economist for IHS Global Insight:

"We expect growth to rebound to about 2.0% in Q1, even with a drag on consumer spending from the loss of the payroll tax cut."

All of which should serve as a lesson to Washington for the next battle: toy with your legislating all you want, but don't toy with economic confidence.