What happens when government spending leads economic growth?

According to new research by the Mercatus Center’s Veronique de Rugy and Keith Hall, the entire increase from the second quarter’s economic growth to the third quarter’s growth can be explained by increased government spending.

According to the Bureau of Economic Analysis, the economy grew by a modest 2 percent in the third quarter of 2012. While this was stronger growth than the preceding quarter, all of the increase in GDP growth came from the biggest increase in federal government spending in over two years.

Is this a bad thing? Well, maybe.

Certainly, growth of GDP is a positive sign. But should so much of economic growth hinge on sustained high government spending? Probably not, particularly when habitual deficit spending is the sole culprit behind the national debt. One could consider the increase of government spending in the third quarter a temporary sugar rush that does very little–if anything–to make it possible for people in the private economy to invest in and build things people consider worth their money.

Another interesting thing to (possibly) take from this chart: It could be argued private sector growth was 0.1% higher in Q2 than Q3 because government spending decreased 0.1% from the previous quarter. The logic behind this argument is government spending affects private sector spending in any number of ways. The causal relationship is impossible to prove, but it’s an interesting notion to entertain by boosters of government spending reductions.

On the impossibility of proving the counterfactual, recall the great economic historian Frederic Bastiat, who wrote the following in his famous essay “What Is Seen And What Is Not Seen:”

“The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”

At what cost did the government spend money last quarter to boost GDP?

We may never know, but we can assume safely there are many things we cannot see, at least explicitly and directly. When government spends, it removes the ability of those in the private sector to spend. And because the private sector is the only place where consumers can vote with their dollars on what they consider valuable, government spending limits consumers’ options, thereby limiting prospects for sustained economic growth and innovation.