Mike Konczal on fiscal austerity

Here’s a recent claim by Mike Konczal:

We rarely get to see a major, nationwide economic experiment at work, but so far 2013 has been one of those experiments — specifically, an experiment to try and do exactly what Beckworth and Ponnuru proposed. If you look at macroeconomic policy since last fall, there have been two big moves. The Federal Reserve has committed to much bolder action in adopting the Evans Rule and QE3. At the same time, the country has entered a period of fiscal austerity. Was the Fed action enough to offset the contraction? It’s still very early, and economists will probably debate this for a generation, but, especially after the stagnating GDP report yesterday, it looks as though fiscal policy is the winner.

I’m puzzled by this.  The first quarter RGDP numbers show a growth rate of 2.5%, which is actually higher than the growth rate of 2012.  NGDP growth is similar to 2012.  How does that show fiscal policy is slowing the economy?

Perhaps fiscal policy is slowing the economy, but I just don’t see it in the data.

BTW, if fiscal austerity did slow the economy, the solution would not be fiscal stimulus, it would be monetary stimulus.  If the Fed is unwilling, an employer-side payroll tax cut would be a good form of fiscal stimulus, much more effective than what they did in 2009.

And I can’t speak for Beckworth and Ponnuru, but I very much doubt the Fed did “exactly what Beckworth and Ponnuru proposed,” which was NGDPLT, if I’m not mistaken.

HT:  Ramesh Ponnuru


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29 Responses to “Mike Konczal on fiscal austerity”

  1. Gravatar of marcus nunes marcus nunes
    27. April 2013 at 12:56

    No, they didn´t. The diet is still off:
    http://thefaintofheart.wordpress.com/2013/04/27/x-raying-the-patient/

  2. Gravatar of Tommy Dorsett Tommy Dorsett
    27. April 2013 at 13:14

    Total federal outlays have fallen in two of the last three years even in nominal terms, yet full-year NGDP growth was 4% in 2012 and 4% in 2011 and 3.8% in 2011. Sure looks like monetary offset and a zero fiscal multiplier to me. What it doesn’t look like is the story Krugman and his Keynesian sycophants are telling.

  3. Gravatar of Negation of Ideology Negation of Ideology
    27. April 2013 at 15:55

    More evidence against Keynesian fiscal stimulus:

    “U.S. economy revved up, but it’s probably temporary”

    http://money.cnn.com/2013/04/26/news/economy/gdp-report/

    “The last two quarters marked the biggest six-month contraction in the federal government’s economic activity since the months following the Korean War, which ended in 1953″

    “Spending by federal, state and local governments is now lower than it was in mid-2007, before the recession began. ”

    So we had the biggest fiscal consolidation in 60 years and a tax increase, but economic growth has accelerated. If Keynesians are right, shouldn’t the economy be tanking?

    Could it be monetary policy? But doesn’t everyone tell us that is innefective at the zero bound? Well, everyone except the Market Monetarists.

  4. Gravatar of Steve Steve
    27. April 2013 at 15:59

    “The first quarter RGDP numbers show a growth rate of 2.5%”

    Also, this is happening in the context of a pan-European recession and a deceleration in China.

  5. Gravatar of TallDave TallDave
    27. April 2013 at 18:12

    As long as the Fed maintains a 2% inflation target, monetary stimulus has never really been tried.

    Also, again, it’s not austerity, it’s solvency, and we’re not doing either — the current long-term budgetary path is insolvency, and we’re still running trillion-dollar deficits. The supposedly draconian sequester “cuts” don’t even bring us to zero nominal spending growth.

    The pro-insolvency position just doesn’t make any sense. The fiscal multiplier can’t be bigger than the resultant tax returns or socialism would be the path to prosperity and we wouldn’t be talking about sovereign debt crises. And having the government waste so much money that they either default or run the printing presses, as a deliberate economic strategy, is insanity.

    All the talk about fiscal “austerity” as it relates to growth or employment is a red herring, it’s like arguing whether the quality of violin play on the Titanic would have been better or worse if they’d avoided the iceberg.

  6. Gravatar of Benjamin Cole Benjamin Cole
    27. April 2013 at 18:24

    Tall Dave:

    Yeah—if the Fed would even hit 2 percent. Right now, inflation by a few measures is running around 1.5 percent.

    Add on: You have various FOMC members pettifogging in public about the evils of inflation. So you are an investor—who do you trust? Bernanke, or will the FOMC board push for even more tightening? The Fed has no credibility with institutional investors. The Fed may, at any moment, buckle before inflationary fears, ala 2008.

    Sumner and Beckworth have mentioned a QE program that automatically ramps up as targets are missed, and I think that is a good idea.

  7. Gravatar of jordan jordan
    27. April 2013 at 18:33

    “If the Fed is unwilling, an employer-side payroll tax cut would be a good form of fiscal stimulus, much more effective than what they did in 2009.”

    That’s a good point, but why is it that I never hear Keynesians push forward supply-side fiscal policy? It’s not as if it would cause a monetary offset problem. All I usually hear is “Well the private sector is suffering from a lack of demand, therefore we need government demand to replace it, blah blah blah”.

    None the less I think this will be a good test for both theories, and if the fed continues to maintain a close to 2% target, I think the austerity/liquidity trap theory will be thoroughly dismantled.

  8. Gravatar of Bob Murphy Bob Murphy
    27. April 2013 at 20:12

    Negation of Ideology, I don’t see how that CNN article is coming up with the claim that total government spending is lower now than in 2007. Look at this FRED chart, which shows it’s not even close; total gov’t expenditures are way higher now, than in 2007.

    Now it’s conceivable that “government expenditures” doesn’t include transfer payments (though the federal amount is $3.8 trillion, which sounds like it’s “total spending”) but even then I would think transfer payments are higher now than in 2007.

  9. Gravatar of Why Economists Will Soon Be Lynched Why Economists Will Soon Be Lynched
    27. April 2013 at 20:39

    [...] Scott Sumner says no, we haven’t gotten level targeting of NGDP, which is what the market monetarists want. But [...]

  10. Gravatar of Tommy Dorsett Tommy Dorsett
    27. April 2013 at 21:37

    Bob – They must have meant govt. consumption and gross investment as a fraction of GDP, which as fallen to pre-recession levels.

  11. Gravatar of Tommy Dorsett Tommy Dorsett
    27. April 2013 at 21:38

    http://research.stlouisfed.org/fredgraph.png?g=hSB

  12. Gravatar of Morgan Warstler Morgan Warstler
    27. April 2013 at 22:32

    the worm turns…

    “So we had the biggest fiscal consolidation in 60 years and a tax increase, but economic growth has accelerated. If Keynesians are right, shouldn’t the economy be tanking?”

  13. Gravatar of J J
    28. April 2013 at 04:51

    Tall Dave,

    Actually, the Fed has announced that inflation can get up to 2.5%. Whether the Fed is doing as much as possible is another issue. But, they have made (some) effort to change expectations about future policy.

    Here is Krugman’s unsatisfactory thoughts: http://krugman.blogs.nytimes.com/2013/04/28/monetarism-falls-short-somewhat-wonkish/

  14. Gravatar of Mike Sax Mike Sax
    28. April 2013 at 04:55

    Scott you said:

    “I’m puzzled by this. The first quarter RGDP numbers show a growth rate of 2.5%, which is actually higher than the growth rate of 2012.”

    I think his point is that GDP is first of all lower than forecasts. Secondly comparing the 1st quarter 2013 to the whole year 2012 is not apples to apples as according to forecasts the 1st quarter was expected to be higher than for the entire year of 2013.

    Even though 2.5% in absolute terms may seem like a decent number it’s still behind schedule. If the 1st quarter is below expectations the whole year may be.

  15. Gravatar of J J
    28. April 2013 at 05:00

    Tommy Dorsett and Negation of Ideology,

    You need to consider counterfactuals. Shouldn’t NGDP growth be picking up? Shouldn’t RGDP growth be improving more quickly and be above 3% by now? The Keynesians’ point is that the Fed can help and can prevent deflation, but seems unable to deliver the inflation necessary to push NGDP or RGDP back to trend. Inflation is now allowed to hit 2.5% before the Fed gets nervous, but it was only 1.5%. Maybe the Fed could be doing more or maybe fiscal policy — had it been more expansionary — would have helped bridge the gap from 1.5 to 2.5. All these numbers are not really good evidence for one side or the other.

  16. Gravatar of Hellestal Hellestal
    28. April 2013 at 05:02

    Krugman has a post on this, too.

    During 2009, the administration came up with a stimulus plan to fight the downturn in the economy. Keynesians like Krugman said, clearly and repeatedly, that the plan was in the right direction but that it would be insufficient to fight the downturn.

    After the plan “failed” — for whatever reason — there were some who blamed Krugman for having advocated stimulus. Keynesian had been tested, they said, and it had failed. Krugman denied this, pointing out (correctly) that he had been saying from the beginning that the plan could be too small to make a difference. He linked repeatedly to his old posts, where he explicitly mentioned the possibility that the plan was insufficient. He vigorously defended the viewpoint that this “test” of his views was not proper.

    Now we have Mike Konczal saying that market monetarism has been tested. We can, once again, go back to the original posts of the market monetarists to see what expectations they had. We can, once again, compare the actual policy that was implemented against what the original recommendations were. A brief search will indicate, once again, that the monetarists — like Krugman before them — believed that the plan was in the right direction but insufficient.

    We remember, yet history still manages to repeat itself.

    Ah, there is a difference. This time, Krugman is saying “we are in effect getting a test of the market monetarist view right now”. This is a rather ostentatious double standard.

  17. Gravatar of Paul Andrews Paul Andrews
    28. April 2013 at 05:11

    BOE:
    “By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, although holdings are heavily skewed, with the top 5% of households holding 40% of these assets,”

    m.bbc.co.uk/news/business-19356665

  18. Gravatar of Bill Ellis Bill Ellis
    28. April 2013 at 05:27

    This is fun.
    We are basically on the same schedule for a recovery as if we had done nothing at all.

    But now economist see every gain as validation of their policies…even though they all think that their particular recommendations were ignored, only to have half measures implemented in their place ( You know, “Communism did not fail…It was never tried !” LOL ) …thus explaining every set back.

  19. Gravatar of ssumner ssumner
    28. April 2013 at 06:20

    Mike Sax, You said.

    “I think his point is that GDP is first of all lower than forecasts. Secondly comparing the 1st quarter 2013 to the whole year 2012 is not apples to apples as according to forecasts the 1st quarter was expected to be higher than for the entire year of 2013.”

    You must be kidding. You are saying that the Keynesian model doesn’t explain movements in RGDP, but rather movements relative to forecast? Why would anyone take that model seriously?

    J, You said;

    “All these numbers are not really good evidence for one side or the other.”

    Agreed.

  20. Gravatar of marcus nunes marcus nunes
    28. April 2013 at 07:13

    Krugman takes a stab at market monetarism:
    http://thefaintofheart.wordpress.com/2013/04/28/krugman-takes-a-stab-at-market-monetarists/

  21. Gravatar of TheMoneyIllusion » Krugman’s double standard TheMoneyIllusion » Krugman’s double standard
    28. April 2013 at 07:21

    [...] Let’s start with the obvious double standard, identified by one of my commenters (Hellestal): [...]

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    5. May 2013 at 15:50

    [...] Scott Sumner said wait a tic, the GDP report shows stronger growth last quarter than the two years before the (alleged) [...]

  24. Gravatar of Charles Sutton Charles Sutton
    7. May 2013 at 11:25

    Regardless of whether or not growth is slower than last year, it seems likely that fiscal policy will/has exert/exerted a drag on the economy because the Chairman of the Federal Reserve says it will. To the extent that Ben Bernanke and the FOMC’s comments affect expectations of nominal growth, they have made it sufficiently clear that they won’t be offsetting fiscal policy that is contractionary and that we should expect the sequester to adversely impact growth.

    I blogged more about this here: http://southofthe49th.blogspot.com/2013/04/expectations-monetary-policy-and.html

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    [...] economists like David Beckworth and Scott Sumner countered that the economy’s 2.5 percent growth rate stuck around despite blows from multiple [...]

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