Jun 26 2014 -
Financial markets shrugged off Wednesday's punch-in-the-stomach report that first quarter GDP shrank by 2.9% on an annual basis, far more than earlier estimates and the worst quarterly decline in five years. Optimists blame the weather and point to faster growth in the current quarter, which is reasonable but still shouldn't overlook ObamaCare's role in nearly sending the economy back into recession.
January saw the formal launch of the Affordable Care Act, and its attempt to transform U.S. health insurance and medical practice. So it's notable that a major cause of the sharp downward revision in first-quarter GDP was a decline in consumer spending on health care. Lower exports and investment also played a role, but the overall decline in health spending from the previous quarter was a startling 6.4%.
Health spending is nearly always a positive contributor to GDP, and in the fourth quarter of 2013 it contributed 0.62%. But health spending fell so sharply in the first quarter that it subtracted 0.16% from economic growth. The Bureau of Economic Analysis, which calculates GDP, hadn't been able to capture the magnitude of the health spending decline in its two previous estimates of first quarter growth.
The decline is especially shocking given that the arc of health spending is always up. The explanation can't be that Americans suddenly had less demand for health care, or had a healthier winter. Our guess is that the turmoil caused by the disastrous ObamaCare rollout confused many consumers into delaying their health purchases. ObamaCare also caused millions of Americans to lose insurance they liked, and it no doubt took time for many to find new policies that suited them and they could afford.
Perhaps health spending will bounce back in the second quarter and beyond, but the first quarter plunge shows what happens when you try to "transform" one sixth of the U.S. economy. The turmoil has damaging consequences. And such damage is all the more risky in an economy that is already growing well below the pace of a normal expansion. It only takes a bad winter and a policy shock like ObamaCare to turn a 2% expansion into a nearly 3% quarterly contraction.
During the 19 quarters since the current expansion began in June 2009, the economy has grown at an annual rate of 2.1%, compared to the 4.1% average in other expansions since 1960, and the 4.9% growth during the Reagan boom of the 1980s. Congress's Joint Economic Committee points out that to catch up with the post-1960 average, GDP would have to grow at 6.5% for the rest of President Obama's second term. The first quarter plunge suggests the economy would have to soar for the rest of the year even to grow by 2% for 2014.
Slow growth is the great tragedy of the Obama Presidency, and one cause is that he put his social and political priorities above the revival of economic growth. The focus on ObamaCare, carbon regulation, tax increases and more social spending added economic burdens that have weighed down growth and caused incomes to sputter for all but the affluent.