2013 and All That

There is continued discussion of how fiscal tightening in the first quarter of 2013 (the fiscal cliff in January and Sequestration in March) was followed by decent growth in the second half of 2014. I have already written much more than enough about this, but I have two more thoughts.

First 2013 was not just a year of Federal fiscal austerity, it was also the year of the taper tantrum when interest rates jumped up immediately following a press June 19 2013 conference where Ben Bernanke said that the Fed would taper it’s asset purchases. This means that there was a contractionary fiscal shock (really mainly the fiscal cliff tax increase January 1 2013 not sequestration) in the first quarter and a contractionary forward guidance of monetary policy shock in the second. No matter what one’s view of the relative effectiveness of fiscal policy and of non standard monetary policy at zero lower bound, one would expect disappointing growth. Also growth remained very disappointing compared to forecasts of rapid growth reducing the output gap as all past US output gaps have shrunk.

Second the lags people use are getting extremely long and variable. The debate was triggered by the surprisingly high growth in the third quarter of 2014 (the rapid growth from the first to the second quarter could be ascribed to the economy thawing after the polar vortex froze 2014q1). This is six quarters after the contractionary fiscal shift and five quarters after the contractionary non-standard monetary shift. This is very odd data analysis, especially since those who believe that fiscal policy works believe it works mostly without long and variable lags.

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