2013 and all that II

A fairly large number of economists have argued that Keynesians predicted that the fiscal cliff January 2013 and sequestration March 2013 would cause a recession. A fairly large number of Keynesian economists have denied personally making that prediction (including the oversigned). Only following a complaint in comments will I look up all the links at which I just hinted.

I think it is fairly easy to decide if the orthodox Keynesian view was that 2013 fiscal contraction would cause a recession. The reason is that official forecasts are Keynesian. The forecasting models range from new Keynesian with added epicycles for the Bank of England to paleo Keynesian for the Fed.

So I decided to look up forecasts for 2013. The advantage is that official forecasts include a precise guess of the expected value of future variables so they give a hostage to fortune.

OK First the CBO “The Budget and Economic Outlook: Fiscal Years 2013 to 2023”

Strikingly the CBO seems to have qualitatively nailed it. The report starts

Economic growth will remain slow this year, CBO anticipates, as gradual improvement in many of the forces that drive the economy is offset by the effects of budgetary changes that are scheduled to occur under current law. After this year, economic growth will speed up, CBO projects, causing the unemployment rate to decline and inflation and interest rates to eventually rise from their current low levels.

They didn’t predict the polar vortex, but seem to have done OK. They are undeniably Keynesian. This is well known but also shown by “effects of budgetary changes”.

The CBO didn’t forecast a recession. They did underestimate real GDP growwth forecasting 1.3% explicitly because of the fiscal cliff and sequestration. Actual year on year growth was 2.2%. Similarly the CBO over forecast unemployment expecting it to stay above 7.5% through 2014.

So there is an anomaly, but not an incorrect forecast of a recession.

update: Pulled back from comments

January 25, 2015 1:10 pm
In November 2012, the CBO specifically addressed the “fiscal cliff” here: http://www.cbo.gov/publication/43694 and predicted a very mild recession IF Congress did absolutely nothing to moderate or prevent the tax hikes and budget cuts scheduled for January 2013. Of course, we didn’t go off the cliff. Instead, we went on a moderated glide path over a few months.

The tax increases were much smaller than those originally scheduled with Bush tax cuts extended for individuals with income up to $400,000 and families up to $450,000. However, they, including the 2% payroll tax increase, were sudden. As I have typed from time to time, the spending cuts were indeed gradual, and actually look just like the preceding glide path due to state and local spending cuts.

end update.

I talk about the Federal Reserve after the jump

The Fed. Hmm google gave me forecasts made in March 2013 by members of the Federal Reserve Board (in passing I vaguely remember that founding new Keynesian Janet Yellen had the best overall record). The board is a methodologically and ideologically diverse bunch. They actually forecast very well, but they are on both sides of most debates. The report gives the distribution of forecasts, not forecasts by forecaster, but it sure looks as if they all or almost all expected an acceleration of GDp growth from 2013 to 2014. There is no mention of any possible recession in 2013 (but I guess they would be very careful about letting such speculation into the minutes).

OK Federal Bank of New York staff forecasts May 2012 (also blue chip forecasts — many probably most of the forecasters use Keynesian models). Under medium term factors “• Significant fiscal drag in 2013” showing they are Keynesian. No recession forecast. Of course they are guessing as to how far off the fiscal cliff the USA will fall and whether the spending cuts promised in 2011 (including sequestration) will actually be imposed. The staff prepared this for the meeting of an advisory council which is pretty much the new Keynesian elite.

A year later, May 2013 with funds actually sequestered, the FRBNY staff seemed not to have changed their views. Still forecasting slower growth in 2013 than in 2014, but not forecasting a recession (which would have been a very eccentric forecast by then).

Near-term influences:
Sequestration: maximum effect in Q2 and Q3
• Extent of underlying strength in private demand
• Production/expenditures tension
• Medium term factors:
• Continued accommodative monetary policy
Smaller fiscal drag in 2014
• Further lessening of other headwinds

The forecasts weren’t exactly right, but I don’t see any special challenge to the CBO New York Fed orthodoxy in the data.