More on Ineffective Fiscal Policy

This is a companion piece to Steve’s AB post from earlier today, where he points out the specious reasoning of  “the likes of Scott Sumner, David Beckworth, Lars Christensen, et al., claiming that fiscal austerity has obviously had no effect on GDP growth.”

I wrote Sumner off a few years ago due to a highly unfavorable chaff/wheat ratio.  I’ve tried really hard to like Beckworth, but these guys simply wallow in confirmation bias.  I’ve repeatedly criticized Beckworth at his blog for cherry picking short-term time series data to make his points.

Comparing 2013 to ’12 is an example of time series cherry picking used to justify absolutist dogma.

Back on Feb 10, Beckworth said: “despite this austerity happening at a time of high unemployment and a large output gap, a slowdown in aggregate demand growth has failed to materialize.”

And also:  “we should at least see aggregate demand faltering over the past few years while this unfolded. But in fact, we see relatively stable aggregate demand growth, as measured by NGDP”

He does admit in the end that, “the Fed has failed to restore NGDP to its pre-crisis trend.” but uses this to get in a dig at the Fed for not following his preferred agenda.

Despite the admission, this is absolutist thinking.  Austerity and demand growth in this view each have an on-off switch.  There is a refusal or unwillingness to recognize matters of degree.  GDP growth is slower than before the crisis, and the slowest of any alleged recovery period ever.  Blaming the Fed willfully ignores the part played by fiscal austerity

My comment, which he also ignored, is as follows. [Graphs added, in place of links.]

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Yes, your graphs all show relative austerity. Except for total government expenditure/GDP – yes falling rapidly, but still higher than any pre-2007 number. And relative is relative. I still think you are considering austerity in absolutist terms.  [Afterthought – total government expenditure as a direct measure is basically flat, not falling over the past three years.  Another example of using a denominator to skew the view.]

We now have the slowest growth in real personal consumption expenditures, % change YoY, of any non-recessionary period in the WW II era. In fact, by that measure, this is the most anemic recovery on record.  [Graph 1]

Graph 1 – Real Personal Consumption Expenditures, YoY % Change

If you prefer GDP growth, this “remarkably stable” measure [% change YoY] has plateaued at or below the level of troughs in the last 8 recessions, going back to 1960. [Graph 2]  So, by that measure, this is the most anemic recovery on record.

 

Graph 2 – GDP, YoY % Change

Unemployment has fallen, but remains at a level above that of most recessions.[Graph 3]

 

Graph 3 – Civilian Unemployment Rate

The worst recovery in my life time is pretty dismal success. Plus, wealth and income disparity continue to increase. With sequester looming, I think we’re in for a very rough ride.

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There are legions of economists who simply refuse to recognize that fiscal policy can make a difference, and are willing to torture data in an attempt to validate this point of view.

If you want to make a point using time series data, you really need to consider what is a valid context.  Is it this year vs last year, or vs long range historical trends?

If you need to cherry pick or engage that ol’ devil denominator to make your point, then your point has questionable validity.

 

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