What would a zero fiscal multiplier look like?
Something like this:
A government report due on April 5 is expected to show employers added 197,000 workers to their payrolls in March. That would be slower than during the prior month but still suggestive of a labor market recovery that is gaining traction.
Despite recent a recent acceleration in hiring, the Federal Reserve has appeared worried that budget tightening by the government could dampen progress made in the labor market, and policymakers last week pledged to keep buying bonds at a monthly pace of $85 billion until the labor market outlook improved substantially.
PS. Don’t believe the headline 1.4% rise in Q4 NGDP. The actual rate of increase was 3.6%, or 2.6% in real terms. You want to always use the NGDI estimate of NGDP, which is more accurate than the NGDP estimate of NGDP. Of course the job growth in Q4 was consistent with a 2.6% RGDP number, and wildly inconsistent with 0.4% RGDP growth.
PPS. Karl Smith discusses an interesting James Hamilton post on the housing bubble. Both support the “mistakes were made” hypothesis. I agree, and would add that in my view the “mistakes were made” hypothesis is the only one consistent with the EMH. If the market (and government and academic) consensus knew it was a bubble then prices never would have risen so high in the first place.
They both rely on a truly ingenious research paper by Ing-Haw Cheng, Sahil Raina, and Wei Xiong.
PPPS. This excellent Ryan Avent post might have been entitled “the real problem is nominal.”
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28. March 2013 at 05:38
Along the same lines, a character named “Economist Hulk” has popped up on Twitter in the past couple days. My favorite so far: “HULK CONFUSED BY @EDBALLSMP. WANTS FISCAL STIMULUS BUT TO KEEP 2% INFLATION TARGET. HULK NOT AWARE OF MACRO MODEL WHERE THIS MAKES SENSE.”
28. March 2013 at 06:43
A decreased deficit will cause “jobs” to be lost, namely government jobs, and jobs at the firms that receive government checks. Since labor adjustments are not instantaneous, we should expect a rise in unemployment, at least in the short run.
Since Bernanke seems to be saying he’s going to continue inflating at a (publicized) clip of $85b/month regardless, he’s basically threatening Congress not to spend less.
28. March 2013 at 07:41
Dan S. That’s great–do you have a link?
28. March 2013 at 08:14
Smith:
“Is it possible that in a world of spontaneous-order and design-without-a-designer, that there are also spontaneous-errors and mistakes-without-a mistaker?”
Words of wisdom for Major Freedom, wherever he is.
28. March 2013 at 08:34
Scott, here’s a link to the one tweet in question.
You might also like this one:
28. March 2013 at 08:54
https://twitter.com/ECONOMISTHULK/status/316684841087275009
28. March 2013 at 09:27
It appears the payroll tax hike has begun its damage of GDP.
28. March 2013 at 10:30
If the market (and government and academic) consensus knew it was a bubble then prices never would have risen so high in the first place.
I’ve found myself making this point a lot too. This bubble can’t be re-inflated because the markets won’t be fooled again.
Bears repeating, though — the government was leaning on lenders to lie about their loans. The risks were being hidden as a matter of policy, in order to serve the alleged social good of getting more people into houses. It wasn’t just the Fannie/Freddie shenanigans, CRA was being leveraged to new effect throughout the 1990s. All this culminated in a massive loss of trust.
28. March 2013 at 12:06
More great stuff from Larry Kudlow!
http://www.businessinsider.com/one-supply-side-economist-who-will-restore-your-faith-in-humanity-2013-3
As Chris Hayes notes on Twitter, Kudlow’s conversion to Market Monetarism seems to be complete. Kudlow tweeted following today’s GDP report:
“With nominal GDP only 3.5% y/y in today’s report, score one for the #MarketMonetarists who want the #Fed to stay loose. Inflation below 2%.”
28. March 2013 at 12:32
By the way, I went to FRED and looked at Kudlow’s calculations. Basically, year-over-year, we’ve had 1.7% RGDP growth and 1.8% inflation.
Using the same calculations, a year ago, we were at 2.0% RGDP growth and 2.0% inflation.
Does this mean that economic growth is slowing down? Or will this quarter’s NGDP and RGDP be revised upwards in future quarters?
28. March 2013 at 13:07
The libertarian Mercatus Center, which is located at George Mason University, has issued its third edition of “Freedom in the 50 States.” It’s a color-coded map of how much freedom there is, state by state, in the US. Its freedom index is based on what Mercatus says is a “combination of personal and economic freedoms.”
http://freedominthe50states.org
28. March 2013 at 13:09
“By the way, I went to FRED and looked at Kudlow’s calculations. Basically, year-over-year, we’ve had 1.7% RGDP growth and 1.8% inflation.”
Consumer goods price inflation right?
28. March 2013 at 13:33
[…] his post Scott Sumner […]
28. March 2013 at 13:33
Geoff,
No, 1.8% is the GDP “implicit price deflator,” which is the difference between NGDP growth and RGDP growth.
28. March 2013 at 16:06
“No, 1.8% is the GDP “implicit price deflator,” which is the difference between NGDP growth and RGDP growth.”
RGDP growth is not directly measured, is it? I thought it is calculated. I thought it is calculated using nominal GDP and the implicit price deflator, which is calculated by estimating price inflation of…consumer goods.
28. March 2013 at 16:50
Geoff,
Fair enough.
28. March 2013 at 19:20
On the Karl Smith link, isn’t a better explanation still an agency one, with the agents betting on government bailouts to keep house prices at least flat nominally. After all they knew that a house price crash would be a disaster for any politician in power at the time. That why the executives concerned were willing to invest their personal wealth in housing as well as bet their companies. It’s similar to the Leman Brothers executives who were heavily invested in their own equity. They didn’t believe that the implicit state guarantee wouldn’t be applied because of the disastrous consequences it would have. Mostly the banking industry was correct on this of course. But only after it was proven with Leman Brothers.
28. March 2013 at 19:42
Chris,
Despite the bailouts, housing prices DIDN’T stay flat. They got crushed.
And the equity values of the banks were crushed. A whole heck of a lot of people lost a heck of a lot of money.
Now, bondholders were spared in a lot of cases. There are certainly moral hazard concerns there. But still, there were tons and tons of people that in hindsight made absolutely crazy equity investments into the housing market.
29. March 2013 at 03:34
John and Dan, Thanks for the link.
Tyler, Yes, and before the tax even took effect! And thanks for the link.
Tall Dave, I agree the price bubble is unlikely to inflate (as much), but reckless lending can resume because the government is subsidizing reckless lending.
Geoff, No the deflator includes all goods, not just consumer goods.
ChrisA, I kind of doubt that. But if it were true, I’m not sure “agency” would be the right term. It’s really a claim about which aggregate the Fed is targeting. But I think people were naive if they thought the government would directly support housing prices–that never seemed likely to me. More likely they thought the Fed would support NGDP, which would have made the housing price crash smaller.
31. March 2013 at 15:59
The payroll tax increase was part of the fiscal cliff deal. We don’t want another Clinton economy on our hands, in which private debt rises until it officially becomes a bubble…
Here’s a link: http://moslereconomics.com/2013/03/30/consumer-spending-rises/
1. April 2013 at 13:31
[…] These checks worked despite going against widely accepted economic theory, and going against what crazy people think about fiscal policy. […]