Government spending shrank by 1.9%.
Of course, that drag on growth has to be weighted by the magnitude of government spending in the economy to figure out its "contribution" to the 2.7 growth rate. That weighted contribution is -0.39%.
If any of you have been wondering why there has been an uptick in talk about "austerity", this is precisely why. Sorry it's so small, but below is a graph of the percent change in real (ie - inflation adjusted) GDP and the percent change in real government spending for every quarter going back to 2007. The blue is GDP, the red is government spending.
There is a lag in the impact of fiscal policy on GDP. Quick policy changes, like changes to tax withholding or transfer payments that take effect quickly, are thought to have lags of one or two quarters. Things like public works projects obviously stretch out over a longer period, but the exact lag depends on how quickly the project is implemented. This is why I was critical of liberals who complained about tax cuts in the stimulus bill. Generally they're right - they do have smaller multipliers - but they act more quickly, and that was important.
This chart doesn't prove (remember all the empirical reservations I've raised about macroeconometrics), but it is consistent with about a six month policy lag. The spike from the stimulus came in the second quarter of 2009. GDP bumped up by the fourth quarter of 2009. A lot of this was the inventory cycle too, but it is consistent with what we would expect from fiscal policy. Government spending (as everyone who has been looking at the numbers and not listening to the pundits knows) has been shrinking. It took about six months for the exogenous government spending shock to make itself felt. I'm quite concerned that this is not going to be a very pleasant autumn.
Does this support Keynesianism? It does and it doesn't. It certainly demonstrates that a demand-side view of the economy is meaningful. The counter-argument would be that we're just putting our thumb in the dike, and we're maintaining malinvestments that need to be liquidated. There may be truth to that as well. I'm inclined to believe that story at least insofar as we're propping up the housing market, for example. But that presupposes that this downturn was not precipitated by an aggregate demand shock. I think there's ample theoretical and empirical evidence that there is, so I maintain the importance of demand management despite the fact that there's probably also some restructuring and readjustment that needs to happen (and I think this graph illustrates the point). I don't see any reason to believe that the restructuring and readjustment is enough to cause this sort of drag on the economy.