Neil Irwin ignores the elephant in the room

The Fed does monetary stimulus in late 2012, citing the need to offset the drag from fiscal austerity.  Then 2012 2013 turns out to be a pretty decent year, no worse than 2012.  Keynesians like Neil Irwin note the mystery and scramble around for explanations:

Why hasn’t austerity been more of a drag on the U.S. economy?

This is the U.S. economy in a nutshell, as revealed in Tuesday’s news ticker: Housing prices rose faster over the past year than they have in the past seven. Consumer confidence hit its highest level in five years. The stock market rallied another 0.9 percent to hover near an all-time high, as measured by the Standard & Poor’s 500. And the national retail price of gasoline has fallen for six days straight and is down 16 cents a gallon since late February, providing nice relief to drivers.

Which all raises an obvious question: Whatever happened to the austerity economy?

And yet not a single mention of monetary offset in the entire article.  There’s more work to be done.  I’ve got to start posting at a faster rate.

HT:  Keep them coming J


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32 Responses to “Neil Irwin ignores the elephant in the room”

  1. Gravatar of Randomize Randomize
    28. May 2013 at 13:55

    “There’s more work to be done. I’ve got to start posting at a faster rate.”

    Perhaps a plane-owning commenter could reprint your posts in skywriting over the NYT’s office?

  2. Gravatar of Steve Steve
    28. May 2013 at 13:56

    Or maybe the confidence fairy really does exist?

  3. Gravatar of Kenyesian Revisionist Kenyesian Revisionist
    28. May 2013 at 14:00

    We’ve always said that the right time for the US to get the budget under control was when private sector growth was firmly in place. Well, now we know that the private sector really is growing well, thanks to [policies we said would not work like QE, and/or were insufficient in magnitude, like the earlier fiscal stimulus]. Just contrast the success of [policies we said would not work] with what is happening in Europe, where we’ve been proved right time and time again: policies which we say won’t work, really don’t work.

  4. Gravatar of BC BC
    28. May 2013 at 14:14

    “The Fed does monetary stimulus in late 2012, citing the need to offset the drag from fiscal austerity. Then 2012 turns out to be a pretty decent year ”
    I’m assuming that last year should read 2013?

  5. Gravatar of Geoff Geoff
    28. May 2013 at 14:22

    Laissez-faire economists know this “recovery” is an unhealthy Bernanke Bucks boom.

    And we’ll be right.

    Again.

    And Dr. Sumner is going to be mad.

    Again.

  6. Gravatar of marcus nunes marcus nunes
    28. May 2013 at 14:29

    Monetary ‘stimulus’ is key. No role for fiscal’ stimulus’:
    http://thefaintofheart.wordpress.com/2013/05/28/good-and-bad-geometries/

  7. Gravatar of Edward Lambert Edward Lambert
    28. May 2013 at 17:08

    There was an income surge at the end of 2012 from tax changes coming in 2013. That income flowed into housing, spending, stocks and some other investments. That is the elephant in the room. Don’t you see it?
    The income surge is slowing down. Lumber prices have come back down already. And people are reaching for yield.
    You will see inflation start to rear its head near the end of the year, as the economy comes close to the effective demand limit.

  8. Gravatar of marcus nunes marcus nunes
    28. May 2013 at 17:10

    One of Scott´s very first post in a nutshell means:
    “Don´t reason from GDP components change”.
    Irwin´s piece is a good example of the mistake. If instead of Y=C+I+G+NX he paid attention to MV=PY he would have “guessed it”!

  9. Gravatar of Jim Jim
    28. May 2013 at 17:29

    Scott,

    I am surprised you didn’t quote the worst part,

    “It’s an exercise in counterfactuals, and what is happening now is essentially the reverse of what happened in 2009. Then, the economy contracted significantly even amid fiscal stimulus, with models concluding that the contraction would have been worse in its absence. Now, the economy is performing well even with higher taxes and spending cuts, suggesting that growth might be even stronger otherwise.”

  10. Gravatar of Bill Ellis Bill Ellis
    28. May 2013 at 18:50

    Elephants everywhere…

    “All else being equal, growth in 2013 should be better than 2012, because the headwinds holding it back are diminishing,” said Michelle Girard, chief economist of RBS. “The impact of the fiscal drag isn’t things getting worse, it’s the absence of things getting much better.”

    Bold mine.

    Things wear out. Pent up demand breaks.

  11. Gravatar of OhMy OhMy
    28. May 2013 at 19:42

    If only austerity hadn’t destroyed half of the Eurozone maybe people would take this monetarism thing seriously. But stupid stupid facts don’t cooperate!

  12. Gravatar of Benjamin Cole Benjamin Cole
    28. May 2013 at 20:12

    Excellent blogging.

    Print more money.

    Market Monetarists need to frame the argument–not that the Fed is “say” but are they doing enough?

    And why is inflation at 1 percent if the Fed is “easy.”

  13. Gravatar of Full Employment Hawk Full Employment Hawk
    28. May 2013 at 22:36

    It is interesting to compare this period with 1937.

    In 1937 fiscal policy turned contractionary and monetary policy also became contractionary. And the economy went into a second dip recession. Keynesians blamed this on the contractionary fiscal policy, while Friedman blamed it on the contractionary monetary policy. Since both happened, it is difficult to unambiguously determine who is right.

    Now we have a different situation. Fiscal policy, especially when state and local governments are included, has become very contractionary. But starting late on 2012, monetary policy has become more expansionary. So this time, unlike in 1937, we have fiscal and monetary policy moving in the opposite directions. And the economy continues to grow, though at its previous unsatisfactorily slow rate, and even shows signs of improving. Clearly the very contractionay fiscal policy did not throw the economy into a second dip recession as orthodox Keynesian theory would predict. The evidence seems to indicate that the expansionary monetary policy is winning out over the contractionary fiscal policy and is the more powerful of the two. This also implies that the economy is not in a full liquidity trap, something I have been arguing all along. If this situation continues this is a major victory of Market Monetarism over orthodox Keynesianism.

    However that does not mean that if fiscal policy were not fighting monetary policy, the growth in output would not have been more rapid. The economy does not have to be in a full liquidity trap for demand side fiscal policy to affect output. The economy still resembles a driver pressing on the gas pedal and the brake at the same time. It just means that the gas pedal is the more powerful.

    Also the claims for the triumph of monetary policy can be challenged from at least two directions.

    With the deficit coming down sharply, the advocates of expansionary austerity will give the credit to the confindence fairy.

    Others will argue that with more than 5 years having passed since the bottom fell out of the economy, the self restorative forces in the economy that eventually ended recessions before there were any stabilization policies have had time to kick in. For example, households and firms have completed all the deleveraging that they wanted to do, and the vacant houses and apartments have been sold and/or rented so that new construction is needed to meet the demand of a growing populaltion.

  14. Gravatar of Full Employment Hawk Full Employment Hawk
    28. May 2013 at 22:50

    “With the deficit coming down sharply, the advocates of expansionary austerity will give the credit to the confindence fairy.”

    This can be refuted by showing that the historical periods when an economy expanded in the face of fiscal austerity were, as Krugmand has pointed out, periods then the austerity was offset by expansionary monetary policy and currency depreciation.

  15. Gravatar of Wonkbook: If austerity is so bad, why is the economy doing so well? Wonkbook: If austerity is so bad, why is the economy doing so well?
    29. May 2013 at 04:25

    [...] Sumner, an economist at Bentley University, has a different take. Congress might’ve hurt the economy this year but Federal Reserve Chairman Ben Bernanke has [...]

  16. Gravatar of ssumner ssumner
    29. May 2013 at 05:35

    BC, Thanks, I changed it.

    Thanks Marcus.

    Jim, Yes, that was also bad.

    OhMy, ECB tight money did the job, just as market monetarists warned.

    Bill, Where was the pent up demand in the 1930s? Fed policy drives the nominal economy. BTW, Look at the Full Employment Hawks comment–by 1937 there should have been lots of pent up demand. Yet the economy had a double dip.

    Whereis the pent up demand in Europe?

  17. Gravatar of Michael Michael
    29. May 2013 at 07:19

    Scott,

    David Herderson has a recent post on Jason Fuhrman, thought to be incoming CEA head.

    http://econlog.econlib.org/archives/2013/05/jason_furman_at.html

    In a post mostly referring to Fuhrman’s pro-Walmart views, he draws attention to the following comment from FUhrman (from an online letter exhange with Barbara Ehrenreich):

    “Personally, I don’t put a huge amount of stock in any of these findings because I believe that Ben Bernanke and the Federal Reserve decide the total number of jobs nationwide.”

  18. Gravatar of The Fed’s been keeping the economy afloat. That’s the problem. The Fed’s been keeping the economy afloat. That’s the problem.
    29. May 2013 at 09:21

    [...] yesterday, seems to be holding up well despite the onset of fiscal austerity. Jared Bernstein, Scott Sumner  and Ezra say I should have mentioned an  important reason: the apparent success of the Federal [...]

  19. Gravatar of The Fed's been keeping the economy afloat. That's the problem. | TwentyfourSevenHeadlines: Breaking Local, National, World & Sports News The Fed's been keeping the economy afloat. That's the problem. | TwentyfourSevenHeadlines: Breaking Local, National, World & Sports News
    29. May 2013 at 09:35

    [...] yesterday, seems to be holding up well despite the onset of fiscal austerity. Jared Bernstein, Scott Sumner and Ezra say I should have mentioned an important reason: the apparent success of the Federal [...]

  20. Gravatar of The Fed's been keeping the economy afloat. That's the problem. – Badly Spelt Words The Fed's been keeping the economy afloat. That's the problem. - Badly Spelt Words
    29. May 2013 at 09:40

    [...] yesterday, seems to be holding up well despite the onset of fiscal austerity. Jared Bernstein, Scott Sumner and Ezra say I should have mentioned an important reason: the apparent success of the Federal [...]

  21. Gravatar of The Fed’s been keeping the economy afloat. That’s the problem. | The Penn Ave Post The Fed’s been keeping the economy afloat. That’s the problem. | The Penn Ave Post
    29. May 2013 at 09:48

    [...] yesterday, seems to be holding up well despite the onset of fiscal austerity. Jared Bernstein, Scott Sumner and Ezra say I should have mentioned an important reason: the apparent success of the Federal [...]

  22. Gravatar of If austerity is so bad, why is the economy doing so well? If austerity is so bad, why is the economy doing so well?
    29. May 2013 at 10:13

    [...] Sumner, an economist at Bentley University, has a different take. Congress might’ve hurt the economy this year but Federal Reserve Chairman Ben Bernanke has been [...]

  23. Gravatar of J J
    29. May 2013 at 10:27

    Here is Irwin’s response:

    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/05/29/the-feds-been-keeping-the-economy-afloat-thats-the-problem/

    He is doing what Krugman always says Keynesians are not: pushing for stimulus because he wants more government. He complains that monetary easing is pushing up stock prices and house prices, which has only second-order effects for poor people without stocks or houses. Yet, those poor people then were only hurt by second-order effects of the fall in stock prices and house prices.

    He wants the Fed to slow recovery so that the government will be forced to pick up the slack and expand/not cut programs that help poor people.

  24. Gravatar of Joe Joe
    29. May 2013 at 10:27

    And right on cue:

    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/05/29/the-feds-been-keeping-the-economy-afloat-thats-the-problem/?wprss=rss_ezra-klein

  25. Gravatar of No money should go in through that door! | Historinhas No money should go in through that door! | Historinhas
    29. May 2013 at 13:10

    [...] yesterday, seems to be holding up well despite the onset of fiscal austerity. Jared Bernstein, Scott Sumner  and Ezra say I should have mentioned an  important reason: the apparent success of the [...]

  26. Gravatar of Full Employment Hawk Full Employment Hawk
    30. May 2013 at 04:01

    “He wants the Fed to slow recovery so that the government will be forced to pick up the slack and expand/not cut programs that help poor people.”

    He is not saying that at all. What he is saying is

    “Still, put it all together, and an expansion like this one, driven heavily by Fed monetary easing, is better for those who are already doing well than would be the case if fiscal policy were driving the recovery train.”

    He is arguing that it would be better if the expansion were driven by expansionary fiscal policy than by expansionary monetary policy, not that the Fed should slow the recoveryin order to force the government to follow a less contractionary or more expansionary fiscal policy.

    What working people need most of all is good, safe jobs and therefore if monetary policy offsets the effects of contractionary fiscal policy, this definitely benefits working people.

    But he has a valid point, even if a less contractionary fiscal policy were completely offset by the Fed with a less expansionary monetary policy,(something that I do not believe to be the case) so that the growth in output and reduction in the unemployment rate were not affected, working people and the poor would be better off from an expansionary policy mix that included a less contractionary fiscal policy and less monetary stimulus. That is a valid point that I agree with. If we did not have the sequester and other cuts in government programs that benefit working people and the poor the majority of Americans would be better off, but the moneyed elite would be less well off. There is clearly a class warfare element in choosing the combination of monetary and fiscal stimulus.

  27. Gravatar of Full Employment Hawk Full Employment Hawk
    30. May 2013 at 04:14

    “There is clearly a class warfare element in choosing the combination of monetary and fiscal stimulus.”

    In order to understand the current controversies about economic policy, one has to understand that there is a class war going on with the moneyed elite and big corporations on one side, and working people and the poor on the other side. The Republicans repesent the interests of the moneyed elite and corporations. About 1/2 of the Democratic party represent the intrests of working people and the poor, and the other half of the Democratic party is sitting on the fence.

  28. Gravatar of J J
    30. May 2013 at 05:12

    Full Employment Hawk,

    You said: “He is arguing that it would be better if the expansion were driven by expansionary fiscal policy than by expansionary monetary policy, not that the Fed should slow the recoveryin order to force the government to follow a less contractionary or more expansionary fiscal policy.”

    The title of the post is ‘The Fed’s been keeping the economy afloat. That’s the problem.’

    He is not just arguing for more expansionary fiscal policy. He is arguing for less monetary policy because he knows that we will only have one or the other and he would rather see a recovery driven by fiscal policy. But, his argument has nothing to do with a recovery and everything to do with a desire for bigger government in general. I’m not opposed to this. I’m just pointing out that it’s now been made clear that at least one Keynesian’s desire for fiscal stimulus is not about liquidity traps, but is rather about government size preferences.

  29. Gravatar of ssumner ssumner
    30. May 2013 at 05:38

    Michael, I saw that.

    J, And even worse, that means he must oppose stimulus like lower MTRs, as that helps the rich.

    FEH, What Irwin doesn’t understand is that debates over stabilization need to be based on different policy regimes, not ad hoc measures.

  30. Gravatar of Full Employment Hawk Full Employment Hawk
    30. May 2013 at 12:47

    “The title of the post is ‘The Fed’s been keeping the economy afloat. That’s the problem.”

    This is an ambiguou statement with two possible interpretations.

    1. The fact that the economy is being kept afloat by the Fed INSTEAD OF being kept afloat by fiscal policly is the problem.

    2. The fact that the economy is being kept afloat by the Fed instead of the Fed not keeping it afloat is the problem.

    My reading of the article is that he supports position 1. He is not saying that the Fed should not be doing this, because then we would have more expansionary fiscal policy. There is nothing in what he says that indicates that he would prefer 2.

    I personally agree with proposition 1 myself. With Fiscal policy being very contractionary I strongly support the Fed offsetting this, actually more than offsetting it, so as to make the economy grow fast enough to bring the unemployment rate down rapidly.

    But I would prefer a combination of expansionary monetary and fiscal policy even if a more expansionary (or less contractionary) fiscal policy were fully offset by the Fed so that the growth of output and employment were not altered, (something that I do not believe to be the case). This is because such a combination would be more beneficial to the great majority of Americans who are working people (as well as the poor) than a purely monetary expansion.

  31. Gravatar of ssumner ssumner
    31. May 2013 at 07:58

    FEH, I strongly disagree that expansionary fiscal policy would help working people more than monetary stimulus. At a minimum you;’d have to describe the type of fiscal stimulus. Miltitary spending? More on the War on Drugs? Tax cuts for the rich? Which types of fiscal stimulus help middle Americans?

  32. Gravatar of Full Employment Hawk Full Employment Hawk
    31. May 2013 at 11:36

    VERY GOOD POINT! I really did not think this through at all. This post deserves a failing grade. It clearly depends on the kind of fiscal stimulus. I was thinking in terms of the kind of fiscal stimulus projects I would favor. For those, I stand by my position. Examples: Increased government assistance for young people from working class and poor homes to attend college without getting hopelessly into debt. A major push to rebuild and upgrade America’s crumbling infrastructure. Increased expenditures on food stanmps and nutrition supplements for poor pregnant women.

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