Mike Konczal: “We rarely get to see a major, nationwide economic experiment at work,”

Here’s Mike Konczal back in April:

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.

And here was Paul Krugman:

as Mike Konczal points out, we are in effect getting a test of the market monetarist view right now, with the Fed having adopted more expansionary policies even as fiscal policy tightens.

And the results aren’t looking good for the monetarists: despite the Fed’s fairly dramatic changes in both policy and policy announcements, austerity seems to be taking its toll.

Yup, we got a test of the market monetarist view.

Yesterday I reported that RGDP growth in 2013 was running ahead of the pace for 2012, using either the official figures or the new Philly Fed GDPplus estimates. Today we received another strong jobs number, which means that employment gains in the first ten months of 2013 are running at over 186,000/month, versus less than 183,000/month last year and 175,000/month in 2011.

Given the predictions of the Keynesian model, anything even close to 2012 results would have been a win for MM.  The Keynesian model predicted a sharp slowdown from the higher income/cap gains/dividends taxes, payrolls taxes, sequester, government shutdown, etc, etc.  But we are running ahead of 2012, and even if the last two months are weak we will be essentially even.

And yet on the Keynesian side of the aisle I hear a deafening silence.  Where is the discussion of this great “experiment?”  Could it be that academics and pundits only like to discuss experiments that validate their priors?

PS.  It would be more accurate to say this was a test of one aspect of the monetarist model; monetary offset. Of course there is much more to market monetarism.  The results of this test, however, also provide strong evidence in favor of another proposition—monetary policy is not ineffective at the zero bound.  But then stock investors have known that since 1933, it’s academics who have been clueless.

PPS.  Please don’t tell me the economy is still too weak.  I know that, and favor more monetary stimulus. But I didn’t draw up the ground rules for the test; Konczal and Krugman did.


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30 Responses to “Mike Konczal: “We rarely get to see a major, nationwide economic experiment at work,””

  1. Gravatar of Morgan Warstler Morgan Warstler
    8. November 2013 at 07:10

    Let’s remember Mike Konczal agrees with GI /CYB:

    https://twitter.com/rortybomb/status/272403538414534656

    Which SOLVES unemployment without any fiscal stimulus at all.

    We also know there is little or no poverty as measured by consumption. See Brookings.

    My napkin math estimates GI / CYB increases consumption amongst the poor, by another 30%.

    THIRTY PERCENT MORE STUFF FOR THE POOR.

    Mike’s not an idiot. He read the plan and fully endorses it.

    The point here is that he doesn’t support MOAR FISCAL because it improves the economy.

    He supports it because it makes big government bigger.

    It REALLY is about hating the guys at the top, not about loving the guys at the bottom.

    It’s about improving the relative status of certain kinds of elites over their corporate masters.

    And its all dressed up as econ babble.

    Who does that for a living? What kind of person?

  2. Gravatar of Morgan Warstler Morgan Warstler
    8. November 2013 at 07:27

    Scott, did you write this headline?

    http://www.cato-unbound.org/2013/11/08/scott-sumner/defense-flexible-monetary-policy

    It is TERRIBLE.

    We are demanding a far less flexible MP.

    It will be brutal in its rigidity.

    Month after month, year after year, we know decades into future what GDP will be.

    The Fed becomes nearly meaningless compared to today.

    Put the meat in the window.

  3. Gravatar of MikeF MikeF
    8. November 2013 at 07:38

    Krugman claims on his blog yesterday that is all due to the 2009 stimulus and resulting stuctural imbalance……

    “And that, ladies and gentlemen, is why European had a double-dip recession, still has incredibly high unemployment, and is in general in such a mess.”

    No mention of monetary policy…incredible…

  4. Gravatar of Hey, why isn’t the US economy worse given, you know, all the tax hikes and spending cuts? | AEIdeas Hey, why isn’t the US economy worse given, you know, all the tax hikes and spending cuts? | AEIdeas
    8. November 2013 at 08:27

    [...] Scott Sumner takes up that pressing and important query: [...]

  5. Gravatar of Michael Michael
    8. November 2013 at 08:50

    This is an odd argument in part because of the moving goalposts but also because of the underlying logic.

    When conservatives talk about ARRA, they love to say: “We tried a big fiscal stimulus and it didn’t work (the economy is still weak), therefore fiscal stimulus doesn’t work.”

    Krugman and Konczal are saying: “We tried a big monetary stimulus and it didn’t work (the economy is still weak), therefore monetary stimulus doesn’t work.”

    The best objection to “the market monetarist view” is that the Fed HASN’T done enough and perhaps won’t ever do enough.

    But that’s not much of an argument for fiscal stimulus, which faces even bigger political headwinds than monetary policy. (And it ignores the offset issue).

  6. Gravatar of Morgan Warstler Morgan Warstler
    8. November 2013 at 10:10

    Michael,

    Again, Mike has ALREADY admitted, we do not need Fiscal Stimulus to solve unemployment.

    That is SANS any change to Monetary.

  7. Gravatar of ssumner ssumner
    8. November 2013 at 10:48

    Morgan, No, I didn’t write it.

    Only six comments, for my most important post of 2013?

  8. Gravatar of edeast edeast
    8. November 2013 at 11:20

    Everyone is too busy working.

  9. Gravatar of James James
    8. November 2013 at 11:26

    The economy is just a black box with some levers to pull and everything rights itself? You are nothing more than a deluded disgusting clown.

  10. Gravatar of W. Peden W. Peden
    8. November 2013 at 12:22

    I suppose the problem was not asking the Keynesians what we should expect, given their model, back at the start of the year.

  11. Gravatar of P. O’Cuana P. O'Cuana
    8. November 2013 at 12:50

    I wonder about the motives of those who oppose fiscal stimulus(bond holders?). They seem to have no clue as to how bad the economy is. A generation is completing its education with out any opportunity. They’ll be permanently impaired in their working lives. Two things however appear obvious: 1) The country is in dire need of investment in infrastructure(how many miles of high-speed rail do we have compared to China?) and 2) The cost of financing infrastructure will not likely be lower(unless we continue on this stupid way. As if fractionally higher GDP this year over last has any material meaning.)

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. November 2013 at 13:14

    The payroll and income tax increase went into effect at the beginning of 2013Q1. The sequestration went into effect on March 1, but let’s assume that it didn’t go into effect until the beginning of 2013Q2.

    Thus tax change multipliers used used by private forecasting firms and by government models such as the Federal Reserve’s FRB/US suggest that about 60% of the ultimate level economic effect of the payroll and income tax increase should have been felt by the third quarter. Similarly government purchase multipliers suggest that about 80% of the ultimate level economic effect should have been felt by the third quarter. See Appendix A for example:

    http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf

    In November 2012 the CBO estimated that the maximum level employment effect would be a decrease of about 200,000 jobs, 640,000 jobs (80% 0f combined payroll and UI effect of 800,000 jobs lost) and 800,000 jobs for the high income tax increase, payroll tax increase, and sequester respectively:

    http://www.cbo.gov/sites/default/files/cbofiles/attachments/11-08-12-FiscalTightening.pdf

    In other words, according to these estimates, the sequester should have decreased employment by about 640,000 jobs, and the tax increases should have decreased employment by about 500,000, as of 2013Q3. That’s a total decrease of 1.14 million jobs.

    Instead, employment was up by 1.7 million in 2013Q3 relative to 2012Q4. That’s a significant increase from the 1.4 million jobs created in the previous three quarters.

    One is stuck with the inescapable conclusion that monetary policy easily offset a major Federal fiscal contraction (with room to spare), which means that the liquidity trap is a myth, and thus the key to a more robust economic recovery is simply better monetary policy.

  13. Gravatar of Brian Donohue Brian Donohue
    8. November 2013 at 16:34

    Mark Sadowski,

    Damned if that don’t look like a smoking gun.

  14. Gravatar of Geoff Geoff
    8. November 2013 at 20:50

    There isn’t a shortage of fiat money. There is far too much of it. This excess is causing an effect the appearance of which seems to be not enough fiat money.

    There is a huge shortage in free market money. That shortage is why the economy remains sluggish.

  15. Gravatar of Geoff Geoff
    8. November 2013 at 20:52

    “Could it be that academics and pundits only like to discuss experiments that validate their priors?”

    Of course. Ask yourself why you’re dead set against an experiment in abolishing central banking and allowing free market money to reign supreme.

  16. Gravatar of Steve Steve
    9. November 2013 at 07:28

    “Only six comments, for my most important post of 2013?”

    Critics are silenced?

    Repost monthly.

  17. Gravatar of Mike Sax Mike Sax
    9. November 2013 at 08:00

    Well Scott if you want more comments I guess I should oblige.

    Steve, I don’t think the critics are silenced in the sense that they’re convinced that Sumner is 100% right. I think a lot of them-based on what they tell me-have given up even trying to engage with Scott as he clearly isn’t interested in hearing critical voices.

    As to this, I don’t get what all the triumphalism is about. I don’t know which “Keynesian model’ you’re talking about-there is more than one-NK, PK, etc.-but many expected growth to be much better than basically the same as last year.

    I know you predicted these higher predictions were wrong. Still at this point who’s to say that the Keynesians who predicted at the beginning of the year that we’d have considerably higher GDP growth than basically another year of 2% weren’t right and that because of austerity it’s been trimmed into another mediocre year? This explanation is at least as plausible as yours are.

    If we have the level of government sector job growth we’ve had in the past we’d truly have something worth getting excited about, ironically enough.

    http://pragcap.com/what-if-barack-the-government-job-slayer-had-been-more-like-reagan-the-government-job-creator

    Contrary to what you suggest, I’m very happy the economy isn’t a lot worse right now but I’m not persuaded that this proves you right about anything important. Put it this way: if we had not had the sequester or even ended it a few months ago, would are GDP and job numbers be lower? IF not then what have you proved?

  18. Gravatar of Mike Sax Mike Sax
    9. November 2013 at 08:03

    I don’t agree with Roche’s implication that we have lost government jobs during this recession because of Obama even though it correlates with his time in office.

    After all, it’s the House GOP who unfortunately control the writing of the budget.

    Still, the larger point is that if we had the level of government job creation we had under Reagan-or even Bush W-we’d truly have a healthy economy now.

  19. Gravatar of ssumner ssumner
    9. November 2013 at 08:26

    James, You said;

    “The economy is just a black box with some levers to pull and everything rights itself? You are nothing more than a deluded disgusting clown.”

    No, I’m actually the Wizard of Oz.

    W. Peden, But they told us the austerity was a disaster for Europe, and would also slow growth in the US.

    O’Cuana, HSR works well in China, but it won’t work here because we can’t build it where we need it (land ownership problems in Northeast) and if we did many would not take it (we are too decentralized.)

    Mark, Very convincing.

    Mike, Then why did the Keynesians claim that slow growth in the eurozone shows fiscal austerity doesn’t work? If you are right then the slow growth in the eurozone shows nothing, as we don’t know the counterfactual. Maybe it was caused by tight money.

    Krugman is the “triumphalist” I’m just showing that his claims have no merit. You seem to agree. That’s good to hear.

    You also ignore that Konczal and Krugman laid down the rules of the “experiment” early in 2013. Isn’t it unfair to change the rules now?

  20. Gravatar of W. Peden W. Peden
    9. November 2013 at 08:41

    Scott Sumner,

    RGDP was supposed to grow >4% this year, don’t you know?

    The 364 economists who said that the 1981 UK budget would deepen the depression did a lot to wipe out whatever credibility Keynesianism had left after stagflation. (There are some people, until recently in very high places, who would not like to be reminded they signed it.) Sadly, not quite the same thing has occured in 2013, but Palaeo-Keynesians have been driven further down the path of “heads I win, tails you lose” reasoning.

  21. Gravatar of steve from virginia steve from virginia
    9. November 2013 at 11:03

    Hmmm …

    I think it’s a bit too early for new-monetarists to claim victory over anything or any one. There is still enough wishful thinking in the USA economic gas tank — along with a blow-off top in finance assets — to keep the GDP illusion creaking along for another short bit.

  22. Gravatar of Jared Jared
    9. November 2013 at 15:20

    Scott – The 2013 data is perfectly consistent with Keynesian theory. Albeit, the data shows that Konczal and Krugman’s specific prognostications were mistaken. In it’s most general specification, after a balance-sheet recession Keynesian theory calls for increased deficits in order to support AD and aid in the repair of private sector balance-sheets. Given that the US ran average fiscal deficits of 7% of GDP between 2008 and 2012, never falling below 4.5%, Keynesian theory predicts that the private economy should have been in a better position in 2013 to pick up the slack of declining fiscal deficits and contribute to private-led growth. Now compare those numbers to Europe. Over the same time period, fiscal deficits in Europe averaged just 3% of GDP, without ever rising above 4.5%. So the strength of the US economy relative to Europe is exactly what Keynesian theory predicts.

    I do, however, understand that monetary policy was different between the two regions too, but that just demonstrates that the evidence underdetermines the theories. We need a case where we have similar monetary stances but different fiscal stances to truly test the theories.

    Konzcal and Krugman, on the other hand, made the further claim that in the face of decreased fiscal deficits in 2013, the private sector was still too weak to grow, despite the five years of deficits that had been providing the private sector with an accumulation of safe net financial assets. They were wrong. If they had placed more trust in the Keynesian belief that extended periods of fiscal deficits strengthen the private sector, maybe they wouldn’t have been so pessimistic. Although, with unemployment near 7.5% and the participation rate at 35 year lows, I understand their worry.

  23. Gravatar of W. Peden W. Peden
    9. November 2013 at 15:29

    Jared,

    “Given that the US ran average fiscal deficits of 7% of GDP between 2008 and 2012, never falling below 4.5%, Keynesian theory predicts”

    I seem to remember from UK austerity debates that Keynesians think that deficits as a percentage of GDP are a misleading indicator fiscal policy, though to be honest I can’t remember what the alternative measure they preferred was.

  24. Gravatar of W. Peden W. Peden
    9. November 2013 at 15:30

    * misleading indicator of fiscal policy

  25. Gravatar of Jared Jared
    9. November 2013 at 17:45

    W. Peden – I agree that deficits as a percentage of GDP can be a misleading indicator of fiscal policy, just as interest rates can be a misleading indicator of monetary policy for market monetarists. You can’t tell much from looking at the government’s budget position alone. High fiscal deficits can be (and often are) the result of constant spending in the context of a crash in the economy with large declines in revenue. In those cases, it wouldn’t be accurate to claim that the government pursued stimulative fiscal policies even though deficits increased. Some Post-Keynesians prefer a functional finance approach, where no attention is paid to the budget position of the government. Instead, the variables worth considering are unemployment, growth, and inflation (and I think NGDP would work here). If unemployment is high and inflation is low, then increased fiscal deficits are warranted, regardless of the current budget position. If growth is impacted by a recession more severely in one economy than another, then higher deficits would be required in the former to maintain an equal growth rate. So you could have an economy running higher deficits than another, but consider the former a more austere fiscal policy, if the recession was more severe in the former.

    As for my prior post, I was assuming the recessions in the US and Europe hit the respective economies to an equal extent. I think Scott mentioned this in one of his recent posts. Taking that into consideration, plus the fact that deficits were approximately an equal share of the two economies prior to the recessions (2.5%), I think it’s fair in this case to treat the sizes of the deficits as a percentage of GDP as a good indicator of fiscal policy.

  26. Gravatar of W. Peden W. Peden
    10. November 2013 at 04:28

    “If unemployment is high and inflation is low, then increased fiscal deficits are warranted, regardless of the current budget position.”

    Again, it’s interesting to apply this to the UK context. Inflation has been above target (and as high as 5%) over the past four years or so in the UK, but during that time Keynesians have been calling for increased deficit spending. Does the “inflation is low” proviso make a difference or not? Perhaps it’s a judgement call among Keynesians.

    In general, I think it’s hard to develop a measure of fiscal policy that would prove the assumed conclusion of many people that fiscal policy has been tighter in the UK than the US.

  27. Gravatar of ssumner ssumner
    11. November 2013 at 06:29

    Jared, Then why were the initial recessions similar in size? Shouldn’t the US recession have been smaller?

    More generally, you may be right, but one implication is that the last 5 years of world history provides no empirical support for the Keynesian model, which is exactly my point.

  28. Gravatar of Gordon Gordon
    12. November 2013 at 12:21

    Scott, in case you weren’t aware David Henderson over at EconLog made a post about this along with Morgan’s comments. He agrees that the results validate your views. http://econlog.econlib.org/archives/2013/11/did_the_federal.html. This is a good sign that MM is winning more people over.

  29. Gravatar of ssumner ssumner
    15. November 2013 at 12:41

    Thanks Gordon.

  30. Gravatar of Is Market Monetarism Pining for the Fjords? Is Market Monetarism Pining for the Fjords?
    3. January 2014 at 16:12

    […] “Dead Parrot” sketch). Scott does a great job busting Mike Konczal, who earlier in 2013 had said the year would be a great test for market monetarism vs. Keynesianism. Since the Keynesian warnings […]

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