When 2013 ended I couldn’t help pointing out that we passed Krugman’s famous “test” of market monetarism with flying colors. GDP growth was initially estimated as being slightly higher in 2013 than 2012 (comparing Q4 to Q4.)
Now the annual revisions are in for 2012 and 2013, and the new numbers look even worse for the Keynesians. Let’s start with the numbers that Keynesians always (wrongly) use as proxies for demand growth—RGDP:
2011:4 to 2012:4: 1.60%
2012:4 to 2013:3: 3.13%
So real GDP growth almost doubled under the weight of higher income taxes, higher payroll taxes and the famous “sequester” which reduced government spending. I predict this will do nothing to shake the consensus Justin Wolfers discusses here.
The theoretically appropriate indicator is of course NGDP:
2011:4 to 2012:4: 3.47%
2012:4 to 2013:3: 4.57%
I was asked if the strong growth in Q2 caused me to revise my belief in the Great Stagnation. Not really, as it is based on long term trends. Or at least not very much. (Don’t forget Q1 was very weak.) I still think we are trending at about 3% NGDP and 1.2% RGDP growth over the next few decades. With immigration reform, both those numbers might rise a few tenths of a percent.
Of course this means low nominal interest rates for the rest of my life. I doubt I’ll ever again see T-bills yield 5%. I hope I’m wrong.
Mark Sadowski missed on the GDP numbers this morning (he had RGDP up 1.6%) but given the massive revisions we often see, perhaps we should wait a bit. He was far and away the best on Q1, but we didn’t know the actual Q1 RGDP figure was negative 2.1% until today. It was originally up 0.1%.
When I started blogging I didn’t know we were in a Great Stagnation. I still think I was right about the mostly demand-side nature of the 2008-09 recession, but in the early years of blogging I modestly overestimated the size of the output gap. I think that gap is now mostly closed, and will be completely closed next year. But keep in mind aggregate supply and demand can get “entangled,” and also that policies like unemployment insurance and Obamacare can slightly impact trend RGDP. So these things are very tough to pin down.
PS. In fairness to the Keynesians, I don’t quite believe that 2012/2013 RGDP growth differential. I think the BEA overestimated the speed-up in growth in 2013.
PPS. I have another post on fiscal stimulus at Econlog.
HT: Commenter Nick
Update: Commenter Kailer Mullet added this:
The year of Austerity, 2013, had the highest Q4/Q4 (if you use absurd decimal precision) in 10 years.