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]
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.
Unemployment has fallen, but remains at a level above that of most recessions.[Graph 3]
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.
I absolutely agree with everything you wrote here (no surprise there eh).
By the way, I posted my thoughts on the Tabarroks 140 characters version of Beckworth’s argument here
http://rjwaldmann.blogspot.it/2013/05/wait-no-more-david-beckworth.html
Basically what you wrote. The appropriate baseline is other recoveries.
JB, I called you a modern day Robespierre, fighting (in this case imaginary) MM absolutism:
Marcus –
I responded at your blog.
I am not fighting imaginary MM absolutism.
I am fighting very real anti-fiscal policy absolutism.
Cheers!
JzB
Marcus:
You play a better Sidney Carton than a Charles Darnay. Jazz has his points.
“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.]”
Actually he’s looking at fiscal austerity in very conventional terms. It’s not the level of spending that matters but the change in the level of spending relative to trend.
The only problem with what Beckworth did is he understated it by only looking at Federal spending, and by not considering that the fact that GDP is itself below trend.
Here’s Krugman on how it should be measured:
“…To see what’s going on, you need to do two things. First, you should include state and local; second, you shouldn’t divide by GDP, because a depressed GDP can cause the spending/GDP ratio to rise even if spending falls. So it’s useful to look at the ratio of overall government expenditure to potential GDP — what the economy would be producing if it were at full employment; CBO provides standard estimates of this number. And here’s what we see:
[Graph]
Spending is down to what it was before the recession, and also significantly lower than it was under Reagan. Bear in mind that in the years since the recession began we’ve seen a significant number of boomers reach retirement age, which would ordinarily have led to rising spending, not to mention the effects of rising health care costs…”
http://krugman.blogs.nytimes.com/2013/04/27/american-austerity-an-update/
Last I checked, G is a part of the GDP formula. It goes up enough, GDP goes up all other elements staying the same. If government spending was doubled overnight, I wonder what every economists would do with their GDP projections. I guess some wouldn’t change theirs, because the FED was not involved. All hail QE!