It appears that the economy shrank in the first quarter of 2014. When we measure the size of the economy by tallying up expenditures, i.e., when the Bureau of Economic Analysis (BEA) calculates GDP(E), the usual method, we find that the economy shrank at a 1 percent annual rate. When we measure its size by tallying up all of the income earned by workers, etc., i.e., when the BEA calculates GDP(I), we find that it shrank at a 2.3 percent annual rate. And as Matt Yglesias reminds us, GDP(I) has a better track record when it comes to measuring short-term fluctuations.
There are many reasons as to why the economy fared so poorly, the bitterly cold winter among them. The BEA, per Matt Zeitlin of BuzzFeed, cited “lower exports, a decrease in new inventories of goods made by private companies, a decrease in new nonresidential buildings, and less state and local government spending” as the culprits. Lower exports can be attributed to sluggish growth outside of the U.S., yet it has at least something to do with our dysfunctional corporate tax system, as is the case with depressed business investment that (presumably) contributed to the decrease in new nonresidential buildings. Less state and local spending, meanwhile, reflects the ongoing weakness of local economies, and perhaps, if we’re lucky, a sober assessment of the long-term liabilities facing state and local governments. The federal government is not directly responsible for the overall growth rate of the American economy, regardless of what politicians claim. It does, however, play a large role in creating the conditions for business enterprises to invest and grow. And it’s not doing its job well.