Does Steady GDP Growth “Prove” that Market Monetarists Are Right About Ineffective Fiscal Policy and Foolish Keynesianism?
You’re seeing a lot of crowing these days from the likes of Scott Sumner, David Beckworth, Lars Christensen, et al., claiming that fiscal austerity has obviously had no effect on GDP growth.
“Look!” they say: “Even with the sequester and all the other government spending cuts, growth in 2013 has been the same as 2012! The notion that government spending affects GDP growth (“Keynesianism”) is obviously false and stupid.”
As Scott says in a recent post:
The left predicts fiscal austerity will slow the recovery, and yet both GDP and jobs are actually a bit ahead of the 2012 pace so far this year.
This is specious reasoning.
1. The “left” prediction has been that “fiscal austerity will will slow the recovery” relative to what it would be otherwise, not relative to 2012, or Q1 2012. Scott, not the lefties, chose 2012 as the benchmark. But I know they know: when you compare 2012 to 2013, ceteris is not paribus.
Look at the four highlighted numbers here, showing growth/decline in the two GDP-component numbers that dominate our economy:
|Chained 2005 $, %, AR||Q1’13 (2nd Estimate)||Q1’13 (Advance)||Q4’12||Q3’12||Q1 Y/Y||2012||2011||2010|
|Gross Domestic Product||2.4||2.5||0.4||3.1||1.8||2.2||1.8||2.4|
|Foreign Trade Effect||-0.2||-0.5||0.3||0.4||0.2||0.1||0.2||-0.4|
|Domestic Final Sales||1.9||1.9||1.5||1.9||1.7||1.9||1.8||1.3|
|Business Fixed Investment||2.2||2.1||13.1||-1.8||4.1||8.0||8.6||0.7|
|Chain-Type Price Index|
|Personal Consumption Expenditures||1.0||0.9||1.6||1.6||1.2||1.8||2.4||1.9|
|PCE less Food & Energy||1.2||1.2||1.0||1.1||1.3||1.7||1.4||1.5|
Personal consumption growth (roughly 70% of the economy) is way up. Shouldn’t we expect 2013 to be kicking 2012’s anemic little butt? You gotta ask: If government spending (20% of GDP) weren’t such a drag, would we (finally) be experiencing robust growth? (Business investment growth also dropped, but 1. it remained positive, still adding to growth, and 2. it’s only 10% of the economy. Residential investment is less than 5%.)
See here, from one far better-credentialed than I:
“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.”
2. The market monetarists’ whole theory is that fiscal policy doesn’t matter (nor, apparently, does anything else) because the Fed will always offset it with monetary policy. So according to their theory, the steady GDP growth is because the Fed has offset the fiscal drag.
But: the Fed has made basically zero changes to policy or guidance since its big announcement on December 12 ($85 billion in Treasury/MBS purchases until unemployment’s below 6.5% or inflation’s at 2.5%), except to state unequivocally that “fiscal policy is restraining economic growth.”
Now maybe the market monetarists want to argue that the December 12 announcement was pre-emptive, proleptically adjusting for the sequester etc. that hadn’t even been legislated yet. In which case their theory would be correct. But that’s suggesting a remarkably prescient reaction function by the Fed, one that I don’t think even market monetarists would want to lay claim to.
Cross-posted at Asymptosis.