Krugman’s blog, 6/22/15

There was one post yesterday, “2013 And All That:”

Those who can, cite evidence to support their position; those who cannot play gotcha. Events have overwhelmingly supported a Keynesian view of the effects of fiscal policy, but the anti-Keynesians have responded, not by reconsidering their views, but by seeking to discredit the messengers. In particular, there’s a lot of “Krugman said X would happen, and it didn’t, so Keynesian economics is wrong.” And in particular particular, the experience of 2013 – when British growth accelerated, and US growth continued despite the budget sequester, is claimed as some sort of decisive experiment.

I’ve already written about the British story – short version: the Cameron government more or less paused in its austerity drive, putting a hold on further tightening. But what about the US story?

Keynesians certainly did argue that the sequester would be a drag on the US recovery, and the economy did in fact continue to recover despite this drag. But in considering the events of 2013 you need to bear in mind two important things.

First, in Keynesian models the economy’s rate of growth depends, other things equal, on the change in fiscal policy. The sequester certainly imposed fiscal tightening; but was it more or less than the fiscal tightening that took place over the previous couple of years, as the ARRA faded out and state governments continued to retrench?

Second, even in 2013, and even on the fiscal front, the sequester wasn’t the only thing going on.

What we should have realized, but I didn’t – at least not fully – was that the sequester just wasn’t that big relative to the economy. TheCBO put the first-year impact on the deficit at $68 billion, or 0.4 percent of GDP, in the first year with much smaller additional impacts thereafter – not trivial, but not huge either.

And the sequester did have a real, visible effect on federal spending – particularly federal consumption. Here’s the annual change in that expenditure:

But this impact was, as I said, not that big relative to the economy, and there were other things going on – such as a sharp slowdown in the rate of fiscal tightening at the state and local level:

So what happened overall? Well, here’s the IMF measure of the cyclically adjusted primary surplus for government as a whole – measured not in levels but in changes from the previous year, which is what should matter for the growth rate:

According to the IMF’s estimates (which are similar to other estimates), there was indeed fiscal tightening in 2013 – but the pace of that tightening was no faster than it had been in 2012 or 2011. So there is no reason we should have seen a sharp growth slowdown, and the fact that growth persisted is in no sense a refutation of Keynesian economics.

I know what the response will be: “But you said blah blah blah!” So what? Even if I did, and even if my remarks aren’t being taken out of context, I am not the Oracle of Keynes, and my fallibility says nothing about how the economy works. If gotcha is all you’ve got, then you’ve got nothing.



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