American Austerity (and Growth)

by on May 3, 2013 at 1:06 pm in Current Affairs, Data Source, Economics | Permalink

Austeritygraph

The red line in the chart above is Paul Krugman’s preferred measure of austerity, the ratio of overall government expenditure to potential GDP. The idea of potential GDP has plenty of problems and biases but I want to be more than fair. In his post on American Austerity Krugman warns:

 the truth is that federal stimulus is years behind us, while state and local governments have cut back, so the overall story is one of fiscal contraction that’s smaller than in Europe, but not by that much.

…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. Bear in mind also that the private sector is still deleveraging, which means that government should be spending more to help sustain the economy. So this is actually a picture of very bad policy. (emphasis added)

I assume that by very bad policy what Krugman means is a policy that is likely to have very bad effects. Hence, I have added to Krugman’s graph the growth rate of real gdp (annual rate). I don’t see the very bad effects. In the 1990s growth was strong even while “austerity” was increasing (falling red line) [as this sentence appears to be driving people mad do note that it is a factual description of the data from which I do not draw a conclusion]. More recently, we have seen a big increase in austerity according to Krugman and his measure but although there has been no boom, growth has remained modest. As Justin Wolfers tweeted this morning with the strong jobs report, “the recovery has been remarkably persistent, and resilient,” albeit not rapid. Scott Sumner argues that this is bye, bye Keynesian multiplier as monetary policy stands triumphant (also here) which is one possible interpretation.

Frederic Mari May 3, 2013 at 1:12 pm

If our economy is ‘monetary policy standing triumphant’, we’re even more f#cked than I thought…

rlk May 4, 2013 at 9:26 am

you are right; what keynes said is that we should save during periods of prosperity and spend during depressions.

and krugman would spend now while the economy is weak and save when the economy is strong.

krugman and keynes would have been happy to use monetary policy if it we were not at the zero lower bound. At this point, if he were in charge, Milton Friedman would be landing his helicopter, having sent checks to all americans, and stimulated the economy. It was MF and not Bernacke who came up with the helicopter reference.

Peter Schaeffer May 4, 2013 at 3:41 pm

rlk,

Perhaps I am missing something, but isn’t Krugman repudiating the core tenets of Keynesian economics? My interpretation was the government should run deficits in downturns and surpluses during expansions.

Is Krugman really arguing that is the level of government spending that counts, rather than the fiscal deficit? In other words, if spending went up by 3% of GDP and taxes were raised enough to yield a surplus, that would be stimulative? Conversely if spending was cut by 2% of GDP and all taxes were eliminated that would be contractionary?

Sounds crazy to me. Is this really the current state of liberal/left macro in the United States?

If it is, then a political deal should be easy to reach. Conservatives agree to higher spending. Liberals agree to massive tax cuts. The deficit goes to 20% of GDP.

Everyone’s happy, right?

Sam Brasel May 4, 2013 at 6:38 pm

“My interpretation was the government should run deficits in downturns and surpluses during expansions.”

Peter, this is both the Keynesian view and Krugman’s view.

Peter Schaeffer May 5, 2013 at 1:36 am

SB,

Thank you.

Wouldn’t that make the absolute deficit level (as a percent of GDP or potential GDP) the appropriate measure of whether fiscal policy is stimulative or contractionary? That doesn’t appear to be the metric in the graph.

pv May 6, 2013 at 9:57 pm

Well, it depends…
It depends on who you raise the taxes, and it can never be blind to that.
Krugman defends that raising taxes on the richer 10% (or something like that) doesn’t affect their pattern of spending, just how much they save, and raising taxes on them would have a pretty much nil effect on the rest of the economy.
Conversely, if you raise taxes on the mid and lower end of the spectrum, those that already save very little, it will have a significant impact on the economy.
And obviously, where you spend the extra government dollars is also going to have an impact on what it does.

And that, my friend is the issue with the current debate: the GOP won’t admit any more tax increases, only spending cuts. And guess what, they want spending cuts that target the fatty middle class while leaving the top 10% alone with their Bush-era tax cuts, low capital gains tax and others. All in the name of the “trickle-down” effect, one of the largest misconceptions of the last century…

Martin May 3, 2013 at 1:15 pm

Tell me what I miss: were the US in what Krugman would identify as a liquidity trap in the 90s, or why should “austerity” back then and its non-existent effects have anything to do with what he is claiming now?

Brandon May 3, 2013 at 2:00 pm

No matter how many times “Zero Lower Bound” is repeated, critics will still apply his current policy recommendations broadly.

mulp May 4, 2013 at 1:17 am

In the 90s, we had a very active “industrial” policy involving hundreds of mandates on business that forced them to invest, and true investing mandates hiring.

The government picked the government run Internet over the private sector AOL, MSN, and a bunch of others.

The government dictated contractors do business over the Internet.

The government dictated all government contractors certify Y2K compliance.

The government dictated all SEC regulated business report Y2K compliance so investors would fear those out of compliance would fail.

A bunch of other mandates Clinton-Gore, and the not-a-conservative Bush were party to creating and enforcing.

Those government dictates alone probably added several percent to GDP, all of it investment, most in the private sector.

Picking the winner of the Internet unleashed a lot of new investment to abandon the losers and get on board the winner, plus others jumped on the Internet gold rush, like Bezos and Musk. Why even Newt got so excited he ordered Thomas.gov be built.

Another couple of percent of GDP.

And there were other initiatives as well.

2000 came and no Y2K problems.

In contrast, the Clinton administration mandated industry come up with digital HD TV or the FCC would pick a winner. By 2000, the industry had agreed to the DTV standards and the implementation strategy with massive investments in engineering and manufacturing laid out. The Bush administration caved to industry on everything so all the investment was in Asia, the highly robotic factories to make the LCD panels were built in Asia, and the switchover from analog to digital was delayed to the last possible date set by Congress years early, and then as Bush was leaving office, the deadline was not being met, so Congress delayed it another six months. My guess is Bush would have handled Y2K that way – Congress would have extended 1999 by six months perhaps, or extended December by months, like Congress extended last December???

The rising oil prices in the late 90s should have resulted in major energy conservative mandates, hikes in the CAFE standards, and such. The 90s policies of granting Gulf leases with zero royalties did not increase production until long after the prices rose above $80.

Not even going to war resulted in any effort to get industry to deliver what was needed for war. The military body armor was obsolete, but nothing was done until the outrage of parent having to buy body armor to send to their kids in Iraq became too hard to ignore. So, not even two wars could drive the growth of the 90s which had large government mandates behind it.

Peter Schaeffer May 5, 2013 at 1:54 am

mulp,

“The rising oil prices in the late 90s should have resulted in major energy conservative mandates, hikes in the CAFE standards, and such.”

Wow is that far off. In 1999, the average crude oil price was $22.55 per barrel. In 1981, it was $30.80. Did crude prices rise from 1998 to 1999? Yes, in 1998 the average price was $8.03 (because of the East Asian economic crisis). However, in 1996, the average price was $21.34. The EIA has a real price viewer over at http://www.eia.gov/forecasts/steo/realprices/.

In 1999, the real price of crude oil was near its historic low. The lack of CAFE standards and conservation mandates was rather rationale.

rlk May 4, 2013 at 8:50 am

you are right; what keynes said is that we should save during periods of prosperity and spend during depressions.

and krugman would spend now while the economy is weak and save when the economy is strong.

krugman and keynes would have been happy to use monetary policy if it we were not at the zero lower bound. At this point, if he were in charge, Milton Friedman would be landing his helicopter, having sent checks to all americans, and stimulated the economy. It was MF and not Bernacke who came up with the helicopter reference.

pv May 6, 2013 at 10:15 pm

The reason is very simple and the man is starting to lose his voice from repeating it so often: In the 90’s the US was nowhere near the “Zero Lower Bound”. FED interest rates averaged 5.14% with the lowest at 3%. So if the economy was slowing down because of austerity, the FED could offset with pushing interest rates down.
Guess what is happening now? Interest rates are at a minimal (0.14%) and all the FED can do is Quantitative Easing to try and offset it. Even though, this is not enough due to the depression due to government austerity, and they are still being hit over the head by the GOP for doing this, all because of the hyperinflation it’s going to cause any time now!… um, now!… um, it’s this time, now!… It’s coming, I just know it, any day…

It is very hard to comprehend an argument if people choose to ignore the biggest caveat to the said argument. Krugman’s is very simple: Austerity is severely contractionary when on the Zero Lower Bound in a depressed economy. Abandon Austerity until we have enough growth to be away from the ZLB

DC May 3, 2013 at 1:19 pm

I think the point is that the large hit to GDP in the downward spike during the recession has not been “made up” following the recession, i.e. that we are now on a permanently lower growth path if we continue with the current policy.

Another way to look it is that if you expect higher than normal growth in a post-recession recovery, and we’re experiencing average-to-low growth, than that IS a bad policy result. Also your scale on GDP growth is so large a range, -11% to +13%, that its hard to the difference between 2% GDP growth and 4% GDP growth in the post recession period… and that would make a big difference. Again, anemic growth is definitely a failure with our current unemployment rate.

Dana May 3, 2013 at 2:35 pm

+1. It’s difficult to understand how one can point to growth around 2.5% (+ or – 1%) for several years and ask “what’s the problem?” This is a growth rate just above 18th and early 19th century growth, much lower if you figure in the downturn. While I think Krugman’s alarmism is self-defeating, the longer this goes on the greater the probability there will be another shock that will drive the growth rate back into negative territory, probably with disastrous effects on consumer confidence. Whatever the growth numbers are, most Americans are not aware that we are no longer in a recession and news that things are getting worse would have very bad effects.

mulp May 4, 2013 at 1:29 am

Increasing near certainty that those over age 50 who don’t immediately find a job will be unemployed for the rest of their lives isn’t a sign of a bad economy nor a reason to be alarm???

JWatts May 3, 2013 at 1:35 pm

Disagreeing with Paul Krugman (Nobel prize winner, NYT columnist, etc) makes you a knave or a fool, don’t you know?;)

urban legend May 3, 2013 at 6:37 pm

Assuming this is snark, are we to conclude that you, and presumably Tabarrok for that matter, really don’t think 20 million unemployed or in crappy part-time jobs when they really want full-time work is much of a problem? You apparently agree that Krugman’s single-minded focus on solving massive unemployment is worthy of ridicule. Why are you and your compatriots, and I’m not sure applying the second, third and fourth syllables of that word is appropriate, so insensitive to the plight of people out of work? If you claim you aren’t insensitive, what is your theory that explains how doing the things Krugman thinks (along with thousands of other economists) are dead-wrong will solve problems our unemployment disaster?

Brian Donohue May 3, 2013 at 7:35 pm

Yes, because having a big heart and maintaining single-minded focus from a gilded ivory tower perch is what it’s all about. How dare anyone criticize Krugman- he CARES.

Mike Hess May 3, 2013 at 8:32 pm

This post isn’t criticism of krugman. It’s criticism of a laughable krugman straw man.

JWatts May 3, 2013 at 10:00 pm

Yep, a complete strawman post, completely misrepresenting Krugman’s position.

I’m always right while the people who disagree with me are always wrong. And not just wrong, they’re often knaves or fools. … Maybe I actually am right, and maybe the other side actually does contain a remarkable number of knaves and fools. –Paul Krugman

http://krugman.blogs.nytimes.com/2013/04/28/knaves-fools-and-me-meta/

:)

GiT May 3, 2013 at 11:37 pm

What’s the point of being disingenuous in this manner? It seems to me to be sufficient grounds to qualify as both a knave and a fool.

The quote absent your, shall we say, “judicious” editing:

“One criticism I face fairly often is the assertion that I must be dishonest — I must be cherry-picking my evidence, or something — because the way I describe it, I’m always right while the people who disagree with me are always wrong. And not just wrong, they’re often knaves or fools. ”

In other words, one could reconstruct this as:

Jwatts: Krugman thinks everyone he disagrees with is a knave and a fool.
Krugman: People are saying I think everyone I disagree with is always wrong and often a knave and a fool
Jwatts: Look, Krugman just said he thinks everyone he disagrees with is a knave and a fool.

It could make a funny comedy routine, but other than that…

JWatts May 4, 2013 at 11:35 am

:)

You can never go wrong by just quoting Krugman. And, of course, I included a link so everyone could see the reference. I have no doubt this audience is intelligent enough to come to their own conclusions about Krugman’s articles and the underlying motives. ;)

byomtov May 4, 2013 at 2:40 pm

I don’t know if youare a fool or not, though I have my suspicions, but cutting the quote as you did definitely makes you a knave.

pv May 6, 2013 at 10:01 pm

As the record proves, you have the causality the wrong way around: if you are a fool or a knave, you disagree with Paul Krugman…

Ashok Rao May 3, 2013 at 1:43 pm

I don’t like the comparison with fiscal consolidation during Bill Clinton. One, there was a huge free lunch from NAFTA and other increased trade/Rubinism. Two, unemployment was a lot lower than it was and the economy was growing faster. Three, the cost of capital was actually high. Entrepreneurs were quite possibly getting hurt by interest rates. Not at all the case today.

Peter Schaeffer May 3, 2013 at 3:54 pm

AR,

“I don’t like the comparison with fiscal consolidation during Bill Clinton. One, there was a huge free lunch from NAFTA and other increased trade/Rubinism.”

Changes in North American trade after NAFTA were never large enough to account for the 90s boom. However, the real point is what changes did occur, were negative. The U.S. trade deficit (NAFTA and global) soared under Clinton (but not as much as under Bush). Trade deficits are a drag on the economy. Of course, the Tech Bubble was more than sufficient to offset the trade effect and indeed the Tech Bubble was (to some degree) a cause of the trade deficit.

If anyone doubts that trade (trade deficits) is profound downer for the U.S. economy, consider what happened after China joined the WTO in late 2001. The U.S. trade deficit with China (and the world) soared. By some accounts, 50,000 factories were shuttered and moved abroad. The Bush administration conjured up the MOAB (Mother Of All Bubbles) to mitigate the economic costs of eviscerating the U.S. economy.

Of course, the bubble ended in a global economic catastrophe that we are still living with. like I say, trade (trade deficits) is not exactly a plus for America.

Locke May 4, 2013 at 1:40 pm

It’s difficult to categorically claim all sectors of the economy do not benefit from trade deficits. Depends who you are. For consumers, the lowering cost of living is good.

Peter Schaeffer May 5, 2013 at 2:03 am

L,

“For consumers, the lowering cost of living is good.”

As long as you have a job…

However, my point is broader. I assert that a chain of causality starting with huge trade deficits led directly to the crash of 2008 which damaged (and continues to damage) almost everyone.

JLK May 3, 2013 at 1:53 pm

GDP matters, and so does employment. 1) Historic employment loss due to financial crisis/NGDP shock/RGDP shock/(your preferred cause or statistic here) creates a big employment hole, followed by 2) Public and private deleveraging doing nothing to fill that hole. For the public sector, the “preferred measure” fell from .36 to .33 with expectations of lower levels to come; more simply, even nominal expenditures are off their peak during the employment crisis.

Erik M. May 3, 2013 at 3:01 pm

I’m glad to see this point made. The graph above says nothing about unemployment and long-term unemployment. You can choose a measure (real GDP) that fails to capture the worst effects of suboptimal recent policy, but that doesn’t prove there are no bad effects.

James Davies May 3, 2013 at 1:54 pm

Krugman’s argument has never been that any and all austerity is bad, but that austerity in a very bad downturn and liquidity trap is bad.

Bill Kilgore May 3, 2013 at 2:16 pm

The “downturn” ended four years ago.

How many years after the recession is over is it OK to adopt measures to end the recession before no one can even begin to take it seriously anymore? If the number is less than 5, we are just about there.

Our “keynesians” are no longer doing stimulus- if they ever were- they are now reduced to what is better termed “papyrus”, a desperate effort to paper over structural flaws in the economy because acknowledging them would be too painful for their existing political coalition.

JLK May 3, 2013 at 2:19 pm

The downturn is not over in the labor market.

Ryan May 3, 2013 at 6:05 pm

Our economy is still operating below its potential. Despite low interest rates, inflation is still low and unemployment is still high. The downturn is over when we catch up to the supply-side limits of our economy.

mulp May 4, 2013 at 1:36 am

But Reagan showed you need tax hikes, spending hikes, and lots of Keynesian deficit spending.

A gas tax doubling is long overdue, and that will mandate spending that added money in advance of it coming in. Reagan doubled the gas tax and highway spending Jan 1983.

john personna May 3, 2013 at 2:38 pm

Exactly, I think. If we de-Krugmanize the framing, wouldn’t we applaud counter-cyclical spending (austerity) in the 90’s boom? Where the heck did any counter-cyclical Keynesian, or for that matter Krguman, argue all spending all the time

jurisdebtor May 3, 2013 at 2:24 pm

“I don’t see the very bad effects . . . As Justin Wolfers tweeted this morning with the strong jobs report.” Wow. I am not sure which is worst; AEI’s (read, James Pehtokoukis’) constant ommission of the poor employment situation when discussing the “triumph” of spending austerity and monetary policy, or TC’s delusions that the job market is in any way strong. Wow. One month where unemployment declines due to actual hiring rather than people leaving the labor market, and we exceed population growth. 2088. The year we close the jobs gap . . . maybe.

Wonks Anonymous May 3, 2013 at 3:00 pm

AT, not TC.

Brian Donohue May 3, 2013 at 2:27 pm

That picture is worth 100 times all the tortured words used to claim Keynesians have been right all along in this here comments section. Great post.

john personna May 3, 2013 at 2:41 pm

Straight from Wikipedia: “Contrary to some critical characterizations of it, Keynesianism does not consist solely of deficit spending. Keynesianism recommends counter-cyclical policies.[13] An example of a counter-cyclical policy is raising taxes to cool the economy and to prevent inflation when there is abundant demand-side growth, and engaging in deficit spending on labour-intensive infrastructure projects to stimulate employment and stabilize wages during economic downturns”

I am really pretty surprised and saddened that so many MR commentators criticized the reduction of Keynsianism, rather than the real thiing.

Ray Lopez May 3, 2013 at 3:00 pm

You sound like a True Believer of Keynesianism, the kind that says the USSR was not “true Communism” hence not representative. Truth is, Keynesianism as practiced is not counter-cyclical but simply deficit spending forever, in a Ponzi like manner, until there’s a collapse. That’s what all presidents and congress save Clinton’s term have done since 1970. And Alex T is right–seems government stimulus (fiscal policy) is irrelevant; only monetary policy matters. The economy recovers regardless of DC. I have argued that since credit default swaps did not peak until spring of 2009 (five months after the fall 2008 contraction) that in fact none of the bailouts from DC made any difference in ameliorating the Great Recession. Ergo DC is nothing but a free-rider parasite on the back of the economy.

john personna May 3, 2013 at 3:04 pm

Back up. Alex’s chart shows government doing what you say it cannot do, reducing spending as percentage of potential GDP in the good times.

Ray Lopez May 3, 2013 at 3:19 pm

“Potential GDP” is a fiction invented by Keynesians–as AlexT stated–look at actual government spending, which is never cut. And “percentage of” is simply a reflection that when the 60% of the economy that is not government, i.e., the free market, finally grows, the government spending as a percentage of the total usually falls. Further, though this is off-topic, keep in mind the government GDP is measured as “spending” rather than producing anything of value. Government GDP spending for defense is counted as a plus even if it is wasteful and unnecessary (e.g, ‘preemptive wars’ in response to a spectacular terrorist attack). By contrast, little in the private sector can ever be wasted since market forces are at work, and market prices are used for outputs, unlike in the government sector. But, as AlexT stated, this is off-topic since we are trying to examine Krugman’s world-view as he sees it.

john prersonna May 3, 2013 at 4:08 pm

Feel free to link a spending to direct GDP graph, I’d think it would show the effect of the 2000 downturn more strongly though. And seriously, “off topic?” I see that ‏@mattyglesias tweets “@tylercowen I am on board with agnosticism. Alex’s post suggests he doesn’t understand what Krugman’s view even is.” That’s what I’m sayin’ and it seems I am in “real economist” company.

john personna May 3, 2013 at 3:07 pm

Oh, and note that when the orange line turned around in 2000, it was in response to a (dot-com) crash (and 9/11). The upswing was caused by the counter-cyclical swing (and wars).

mulp May 4, 2013 at 1:43 am

So, the Republicans while in power are hyperextreme Keynesians and turn into austerians when not in power ever since Reagan et al renamed “Keynesian economic” “supply side economics”.

pv May 6, 2013 at 10:24 pm

Ray, great job in reducing the right-wing interpretation of Keynesianism, ignoring the counter-cyclical part because everyone knows that increasing government spending is forever, and their ultimate goal is to make the US a socialist state.

No in-between, no grey area in which the center is actually white. One is either absolutely right, or absolutely wrong…

jurisdebtor May 3, 2013 at 3:04 pm

You mean like counter-cyclical policies where government spending will decrease during boom times, such as during the 1990s, therefore we should expect some “austerity”, and therefore AT’s comparison is ridiculous?

john personna May 3, 2013 at 3:09 pm

Unless I’m missing something, it does seem crazy to say “See! the Keynesians cut spending in good times!”

Brian Donohue May 3, 2013 at 3:36 pm

So Newt Gingrich and a President that went around saying “The era of big government is over” are Keynesians?

Lefties can make an argument here, but it ain’t about the efficacy of ‘stimulus’- rather the opposite, viz. that tax increases are less destructive than imagined (1990s) and tax cuts less beneficial (2000s).

This whole ‘during good times’ thing feels rose-tinted to me anyway. Go back to 1993 and read about all the horror and gloom and doom.

The economy has added six million jobs since May 2010, but you don’t even have to leave this comment board to read that “The downturn is not over in the labor market.” ‘Good times’, it seems to me, are only ‘good times’ in retrospect. And the corollary is: NOW is ALWAYS a good time for some stimulus.

john personna May 3, 2013 at 4:09 pm

Mood affiliation much? I was a lifelong Republican, now independent. I think I am thinking independently ;-)

Brian Donohue May 3, 2013 at 4:19 pm

‘Mood affiliation much?’ I don’t understand what this means, other than it makes you sound like a hip adolescent.

I am aware of your declared historical political affiliation, but since I was responding to the content of your comment rather than issuing an ad hominen, I fail to see the relevance.

john personna May 3, 2013 at 4:33 pm

I thought “mood affiliation” was an MR inside joke … and were you serious with that Gingrich and “lefties” stuff? If I try I can make a rational and non-ideological response for you. You could say that in the 90’s with the economy grown strongly, raising all boats, there would naturally be less popular demand for government services, and that both parties would respond. This response could be seen as a swing right.

And that’s what we got, right? Clinton signed a lot of pro-market bills that his left wing decried. He could, because those were good times.

Brian Donohue May 3, 2013 at 4:40 pm

Take your pick (choose one only):

“See! the Keynesians cut spending in good times!”

“Clinton signed a lot of pro-market bills that his left wing decried.”

john personna May 3, 2013 at 5:13 pm

Ever heard of either free trade or banking deregulation, Brian?

Brian M May 3, 2013 at 2:28 pm

Ladies and Gentlemen, this is how you troll.

Ashok Rao May 3, 2013 at 2:37 pm

“That picture is worth 100 times all the tortured words used to claim Keynesians have been right all along in this here comments section. Great post.”

Do me a favor, and take it’s slope. Tell me if you feel the same way now (http://bit.ly/11Hxe67). The acceleration of growth should be rapid after bad falls to get back on trend. Growth was growing faster between crashes (as in the concave-down part of the business cycle) than it was today. That is precisely not how this is supposed to work.

Cliff May 3, 2013 at 3:07 pm

Ashok, shouldn’t GDP grow slower after a bubble, to get back to trend (from before the bubble)?

Ashok Rao May 3, 2013 at 3:21 pm

If you think this was a crisis of tight money (and Milton Friedman always reminds us low rates indicate historical tightness) then we should have above average growth rates.

I will give this, output gap is smaller than Keynesians make it to be.

Ryan May 3, 2013 at 2:49 pm

The debate about “austerity” and “multipliers” and all the rest is so fraught with arbitrary definitions and confirmation bias that it’s totally useless. Advocates on either side constantly see every event as confirmation of their views. Even the word “austerity” is typically not well defined by the people who use it; and as Prof Tabarrok has suggested, when advocates do define it, their own definition can be used to contradict their claims.

The Keynesian story can be proved or disproved simply by selecting the counterfactual you need or defining “austerity” in a certain way. We simply don’t know a lot about the usefulness of various kinds of countercyclical fiscal policy.

john personna May 3, 2013 at 2:58 pm

I am a non-professional, but I like my fuzzy definition. The is stimulus, and it’s opposite, austerity. That makes the idea as simple as push and pull, up and down. Now, once you have the fuzzy definition you have to recognize that government actions (not just tax and spending) can map into one or the other. Perhaps a reduction in copyright term would be stimulative. Perhaps a too-strong patent system would retard growth, and thus cause a kind of austerity. Certainly spending itself can be one or the other well, and certainly depending on the state of the economy. The Fed just said now is the time to spend, in fact.

In terms of America in 2013, I think we have to recognize that we have the ability to borrow, and thus should at least scan for productive endeavors … judging them on a project-by-project basis.

dead serious May 3, 2013 at 3:42 pm

Again, I say unto thee, let’s start this austerity kick by chopping the defense budget by 2/3.

If government spending really is your primary bugaboo, then put up or shut up (not you per se, but Republicans in general).

Brian Donohue May 3, 2013 at 3:55 pm

It’s already started. Tax increases on the rich and sequester (pentagon and discretionary domestic) cuts.

The first hits the rich, the second hits mostly Republican supporters of defense, and the third hits the poor and government pork.

So far, the middle class has been spared (tax increases and entitlement cuts.) So far. The heavy lifting is not a Democrat/Republican thing, the middle class being sacred in the rhetoric of both parties.

dead serious May 3, 2013 at 4:26 pm

http://en.wikipedia.org/wiki/Budget_sequestration_in_2013

“The spending reductions are approximately $85.4 billion during fiscal year 2013,[1](p14) with similar cuts for years 2014 through 2021. However, total federal outlays will continue to increase by an average of $238.6 billion per year[1](p3) during the next decade, although at a somewhat lesser rate because of the sequester.”

Feel free to cut more military spending, Rs. There’s lot more meat on that bone.

Brian Donohue May 3, 2013 at 4:35 pm

Amen. Anyone who looks hard at the unpleasant alternatives facing the US realizes that Pentagon cuts are comparatively low-hanging fruit.

Libertarian Republicans are, I think, definitely on board.

But let’s not just beat up on defense hawks. Democrats have yet to offer up any of their sacred cows.

dead serious May 3, 2013 at 4:43 pm

I don’t have a problem reducing social program benefits. We also need to identify and prosecute benefits fraud. What else?

If you cut medical programs, how much and what criteria do you use? Across the board cuts? Means-testing?

Brian Donohue May 3, 2013 at 4:56 pm

These are huge questions. I’d start by using ‘insurance’ to only cover insurable events, not as a Trojan Horse for large-scale redistribution. A rich country can and should provide true insurance to all citizens against loss of income due to old age, disability and premature death, as well as true health insurance. Subsidizing the cost of condoms is not insurance.

dead serious May 3, 2013 at 5:28 pm

True, but subsidizing the cost of condoms might prove a huge net cost savings if you’re worried about future drain on social programs.

Yes, I’m liberal-leaning and yes, I just said that.

Wonks Anonymous May 3, 2013 at 2:59 pm

Sumner cites Beckworth on austerity in the U.S being greater than Europe, and Beckworth also uses government expenditure as a measure. HOWEVER, if you take into account tax increases, then European austerity doesn’t look so piddling. Keep in mind that the Alesina “expansionary austerity” literature finds that austerity through tax increases (or without accommodating monetary policy, which we’re already discussing) generally fails. So for the power of monetary policy to overcome tax hikes during a slump, you’d have to cite something like FDR’s gold devaluation after the Hoover hikes, and even that was in the context of continued deficits rather than any austerity to shore up balance sheets.

Mark A. Sadowski May 3, 2013 at 5:00 pm

Another way of measuring fiscal policy stance that Paul Krugman has recently referred to in his blog is the “cyclically adjusted primary balance” (“Self-destructive Europe”). This of course takes into account any tax changes that might have occured.

The IMF projects (April 2013 Fiscal Monitor) that between 2010 and 2013 the cyclically adjusted primary budget balance as a percent of potential GDP will increase by 4.0% in the US and will increase by 3.8% in the eurozone so even by this measure the US has done more fiscal austerity than the eurozone.

This shouldn’t be too surprising, as when the IMF looked at changes in revenue items between 2009 and 2012 (Figure 15):

http://www.imf.org/external/pubs/ft/fm/2012/02/pdf/fm1202.pdf

The only EA17 members they found to have raised taxes more than the US were Belgium, Greece, Italy, Netherlands and Portugal. (Finland, Germany and the Slovak Republic actually cut taxes.) And that was before this year’s US federal payroll and income tax hikes.

Mark A. Sadowski May 3, 2013 at 5:24 pm

“Keep in mind that the Alesina “expansionary austerity” literature finds that austerity through tax increases (or without accommodating monetary policy, which we’re already discussing) generally fails.”

When the IMF looked at spending versus tax based fiscal consolidations under similar circustances to those which Alesina considered, they found similar results as well, but they ascribed the difference in effects to differences in monetary policy (pages 103-104):

http://www.imf.org/external/pubs/ft/weo/2010/02/pdf/c3.pdf

That is, for whatever reason, central banks were more accomodative of spending based fiscal consolidations than tax based ones.

Now we have situation where two currency areas, the US and the eurozone, have engaged in substantial fiscal austerity, with the US evidently both increasing taxes and cutting spending by more than the eurozone in aggregate, and where both currency areas are constrained by the zero lower bound in interest rates. But the US has engaged in substantial unconventional monetary stimulus, and the eurozone has not, and the US economy has grown much more in both nominal and real terms than the eurozone’s economy.

In effect this confirms that the IMF’s results hold true even for unconventional monetary policy.

MattW May 3, 2013 at 3:25 pm

Is there a point where it’s desirable for the govt to start looking forward to the next recession? I mean it’s been 5 years since the beginning of the last recession, and average amount of time between recessions since WW2 is less than 6 years (not that I think another one is imminent, but it is out there…).

Ryan May 3, 2013 at 6:22 pm

Isn’t that like deciding when to stop for gas based on the time between the past few stops rather than looking at the fuel gage?

Mark A. Sadowski May 3, 2013 at 4:26 pm

Paul Krugman:
“…the truth is that federal stimulus is years behind us, while state and local governments have cut back, so the overall story is one of fiscal contraction that’s smaller than in Europe, but not by that much.”

The IMF projects (April 2013 WEO) that between 2009 and 2013 general government expenditures as a percent of potential GDP will fall from 41.6% to 37.8% in the US (a decrease by 9.2%), and will fall from 49.6% to 48.0% in the eurozone (a decrease by 3.3%) so by Krugman’s own criteria the U.S. has done nearly three times as much fiscal austerity as the eurozone.

In contrast, since August 2008 the Fed has increased its monetary base by 241% whereas the ECB has only increased its monetary base by 52%. So by that criteria the US has done nearly five times as much QE.

By definition aggregate demand is nominal GDP (NGDP). Thus the impact of monetary and fiscal policy can be measured by looking at the change in NGDP. The IMF projects that from 2009 to 2013 that NGDP will increase by 16.2% in the US, and by by only 7.6% in the eurozone. The IMF also projects that from 2009 to 2013 that real GDP (RGDP) will increase by 8.5% in the US and by only 2.5% in the eurozone.

The bottom line is, whatever happened to the liquidity trap?

Anonne May 3, 2013 at 6:22 pm

The liquidity trap centers around full employment.

Mark A. Sadowski May 3, 2013 at 6:58 pm

No, a liquidity trap is simply a situation in which monetary policy is ineffective. Theoretically, it is totally possible to be in a liquidity trap at full employment, just as it is evidently possible to not be in one at a level below full employment.Thus the liquidity trap has absolutely nothing to do with full employment.

Anonne May 3, 2013 at 8:04 pm

Well, to answer your actual question, the liquidity trap is still here – monetary policy is still ineffective – if you mean to push up employment to full employment. The question is, therefore: since a liquidity trap can happen even at full employment, what is it exactly that you are asking monetary policy to do in such a situation? In our current situation, policy is ineffective to create the incentives to invest capital and expand (therefore putting unused resources to work) rather than hoard money.

Mark A. Sadowski May 3, 2013 at 9:20 pm

“Well, to answer your actual question, the liquidity trap is still here – monetary policy is still ineffective – if you mean to push up employment to full employment.”

And yet total private industries employment has increased from 106.85 million in February 2010 to 113.63 million in April 2013 or by 6.78 million jobs despite significant drag from fiscal policy.

“The question is, therefore: since a liquidity trap can happen even at full employment, what is it exactly that you are asking monetary policy to do in such a situation?”

Speaking on behalf of myself, probably nothing.

“In our current situation, policy is ineffective to create the incentives to invest capital and expand (therefore putting unused resources to work) rather than hoard money.”

And yet gross private domestic investment has increased from $1.395 trillion in 2009Q3 to 1.991 trillion in 2013Q1 in 2005 dollars, or by 42.7%.

Ashok Rao May 3, 2013 at 5:09 pm

Here’s another graph that shows how abysmal the recovery is, as opposed to a “persistent” 2%.

http://bit.ly/17C7gVG

I made a graph of the past five recessions, comparing the fall in output gap against months after the start of a recovery. It’s scary to see how out-of-tune our recovery has been. As a model would predict, the higher the y-intercept (the worse the crisis at its peak), the quicker the recovery (the higher the |slope|). Except this one. In fact, we’re recovering by this measure worse than the dot-com bust.

1982, which was comparable, did in 20 months what we did in 50. And the rest didn’t even get so bad as the point of our current recovery. Do not let a noisy growth graph tell you that we are somehow okay. You might disagree that austerity is the problem (maybe you want easier money, maybe you think markets are best left on their own).

Whatever the case, I think it’s impossible to argue this recovery is somehow “solid”. Usually agree with Wolfers, but really don’t see how this is the case.

bnfenster May 3, 2013 at 5:33 pm

Alex is not being above board here and he knows it. He is mischaracterizing Krugman’s argment in ways that Krugman has already anticipated and addressed many times. (Krugman himself claims he is a deficit hawk in booms and often quotes Keynes: “The boom, not the slump, is the right time for austerity at the Treasury”). In posting such a dishonest assessment Alex proving krugman’s points about conservative hacks.

Harsh Agarwal May 3, 2013 at 5:45 pm

Dr Tabarrok and Dr Cowen (especially to Dr Cowen)

I love this blog. It is a treasure trove of information, ideas and insights. Your collection of links are artfully chosen. Brilliant.

But, your macro is not of the same standard. You don’t like Dr Krugman, that a child could tell (I would not even begin to be as presumptuous as to try and guess the reason). You don’t always agree with his analyses, and that’s fine. I have never ever written about this to you before, and I don’t know why I am today. Maybe just because.

This post is horrible. Steady recovery. Really? Where is the high rate of current unemployment rate being talked about in that graph, and the subsequent paragraph? Comparing a ZLB liquidity trap with a demand shortfall to the 90s and early 00s is okay without giving a list of caveats?

Why do you do this to the sincere fans of your blog, and of yourselves? I am not an American, and have no political affiliations in the country.

Anonne May 3, 2013 at 6:20 pm

Because hating on Krugman brings eyeballs to the blog. If they’re lucky, Krugman will link to it at some point, bringing more eyeballs to the blog. I sincerely hope that he doesn’t.

I can respect people who counter anyone’s argument – not just Krugman’s – from a position that is intellectually honest. But he has made it cleart hat he does not really read and doesn’t care to understand his opponent. So it is likekly wise pass over any blog invoking Paul Krugman by this author.

Christian Sieber May 3, 2013 at 8:43 pm

The reason this happens is because political identity trumps all in American political discussion, even for people with alleged economic expertise. Since the evidence demonstrates that Krugman is right on the money, new evidence must be cooked up and misconstrued to show that he isn’t. Admitting that he is correct is not permissible.

That’s why this post is so bad, to the point of being at best woefully ignorant or at worst extremely dishonest.

And that, in turn, is why Krugman is so mad at conservative hacks all the time — because they are everywhere, and because the hackery reaches into corners of the Internet like this one.

John May 4, 2013 at 8:16 am

Krugman says we have had massive austerity over the past 3 years. His model implies this should result in a big fall in gdp growth. That hasn’t happened. Instead growth has been slow, slower than we would like, but steady. That is Tabarrok’s point. Few people here are addressing the issue.

Phb May 3, 2013 at 6:30 pm

Thats really weak. Seriously. How can you post something so not well thought through? As a student you’d be told to shape up… If you don’t see your fault out of int. laziness, see http://www.slate.com/blogs/moneybox/2013/05/03/keynesianism_today_start_by_stating_the_argument_correctly.html

For some reason, i feel this post is just about getting some attention from the big man himself… Which fair enough i guess… But by means of uch loppy thinking. Really?

Phb

Turpentine May 3, 2013 at 6:31 pm

*yawn* I hope he took a look at Yglesias’ blog. Somehow he can figure out the difference between “at capacity” and “below capacity”. Gosh, kindergarden fights, that’s what it is.

perfectlyGoodInk May 3, 2013 at 7:30 pm

The only remarkable thing about this recovery is how sluggish it has been. This is a better graph (via Bill McBride).

wj May 3, 2013 at 11:03 pm

There’s no sane argument against Krugman. He’s right, and pretty much everyone else who would even contemplate contending with his assertions grounded in reality, is to have their theories committed to the flames.

Randall Parker May 3, 2013 at 11:33 pm

The funniest thing of all about economists who debate macroeconomics with just 1-2-3 variables: Surely those variables by themselves are not sufficient to account for much of the factors that influence the rate of economic growth. Alex’s adding another variable was a step in the right direction. But how about throwing in energy costs, demographic changes, raw materials costs, trade deficits and other things that really matter?

Boonton May 4, 2013 at 8:19 am

I’m watching my friend drive a car. Back when we were going downhill, back around exist 90 or so, I noticed he wasn’t pressing on the gas pedal very much but the car was moving pretty fast. Now we are around exist 13 or 14 and going uphill. He’s pressing the gas pedal a bit harder than he was around 95, but the car isn’t going very fast.

This must mean the gas pedal of a car has no relationship to its speed. Will Alex now send me my Economics PHD in the mail?

ThomasH May 4, 2013 at 9:46 am

Alex’s comment does not seem to address the center of the debate: given suboptimal Fed policy in 2008-09, was there not a case for fiscal policy which would result in large deficits so long as the economy was weak. “Austerity” should be judged according to the state of aggregate demand.

John May 4, 2013 at 10:14 am

The toppling of Reinhart-Rogoff has brought to light, underscored, and here generates more of the tendentious blindness and/or bad faith and/or mendacity of our “conservative” economics. Now added to the effusion is a scent of desperation.

Eli Rabett May 4, 2013 at 12:16 pm

The Overton window is shifting even among the VSPs and the Taborraks are trying to stop this. It started with Occupy, Krugman has played an important role. Reinhart-Rogoff exposed the level of manipulation driving austerity. It should get interesting when this penetrates down to the unemployed and the folks who lost their houses in the Great Recession. Pitchforks anyone?

Politics Debunked May 4, 2013 at 12:02 pm

I’d suggest looking even further to see how government spending compares to growth. Most of the time in the US and around the world, the faster the government grows, the slower the private economy grows (and vice versa), as this page details:
http://www.politicsdebunked.com/article-list/spendingpattern

It is easy to see in the public data sets if people bother looking. Cause and effect are harder to isolate of course, but that is a first step.

Bob Wyman May 4, 2013 at 2:13 pm

Of course “austerity grew” during the 1990’s when growth was strong! That is precisely when Keynes said it should grow. In the 90’s, “austerity” was the right thing *because* growth was strong. Austerity was the response to strong growth, not its cause.

The general rule is:
When the economy is weak, the government should spend, borrow and tax less.
When the economy is strong, the government should save, pay down debt and tax more.

There is a time for spending and a time for saving. We need to save during the good times so that we have money to spend during the bad times.
This is one of the oldest economic principles, much older than Keynes. You’ll find it in the Bible as “The Pharaoh’s Dream.” Joseph, told the Pharaoh to prepare during seven years of plenty for seven years of famine by taxing agriculture at 20% of production and saving the “revenue” so that it could be spent later. This basic principle of how a government should manage its money hasn’t changed since when those words were first written thousands of years ago.

Merijn Knibbe May 4, 2013 at 2:16 pm

Well, we obviously need a definition of austerity. As the post focuses on GDP data (rightly) it is best to start with these data, as published by the BLS. From the April 26 press release:

“Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.5 percent in the first quarter of 2013 (that is, from the fourth quarter to the first quarter), according to the “advance” estimate…

… source data that are incomplete or subject to further revision by the source agency…

The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, residential investment, and nonresidential fixed investment that were partly offset by negative contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.”

I.e. – more expenditure leads to more (nominal!) production as it leads to higher sales. An emergent property of monetary market systems is that changes in (nominal!) production are caused by changes in final spending. Notice that the source, though not using current prices but prices deflated by the price index, still measures a kind of monetary production, not any kind of physical production. In this case, ‘positive contributions’ of the private sector ‘were partly offset by negative contributions from … government’. Total (nominal!) income would have been higher if the government had increased spending. Or when exports had increased. Or when investments had increased. Or consumption… The point is of course where the money comes from. Old fashioned economic models assume that income is the main source of spending. More advanced models, including the national accounts, accept that domestic money can also be created by lending and borrowing, which means that spending can be quite a bit larger than income in the previous period or even in the running period (we call this a current account deficit). However – borrowing leads to debts. Let’s define austerity as the idea that to serve these debts we have to cut back expenditures, to save money. Not just government expenditure – also investments and consumption, note the extreme increases in VAT rates in Europe. In the end this will happen (at least when the country has a sizeable export sector, unlike the situation in Greece). The economy will, as domestic spending decreases, increasingly become centered on export production. Though not necessarily because exports increase. And only at the cost of extreme unemployment and much, much lower incomes. Austerity is NOT just about rolling back government expenditure, at least not in the Eurozone. It’s about rolling back all expenditures, until domestic expenditure has shrunk enough to cause imports (parts of domestic expenditure concerns imported goods and services) to plummet enough to leave an current account surplus, which can be used to pay back the debts. And the idea that low wages lead to a staggering growth of (net) exports? Please, check the 2013 January and February data on Greek and Irish exports (Irish and especially Greek wages declined quite a bit) – a disaster. And indeed – a decline in government expenditure can be offset by an increase is consumer spending, or exports, or whatever. Or not. Use the whole national accounts, when you write about austerity – that’s the idea about macro.

David Dickinson May 4, 2013 at 2:42 pm

Yeah, we’re doing great, right? The rich are killing on Wall Street, and unemployment is only 7.5%, so all is forgiven.

Jeezus, help us.

EC May 5, 2013 at 12:02 pm

I agree with all the other comments pointing out that you are grossly mischaracterizing Krugman’s view–kind of like saying, “Krugman says in order to get warm you should put wood on the fire, but I have a chart here showing that in August he didn’t use as much wood–and he still didn’t get cold.” This sentence is particularly dumb:

“In the 1990s growth was strong even while “austerity” was increasing “

John May 6, 2013 at 12:43 pm

Please explain which part of Tabarrok’s sentence you disagree with that growth was strong in the 1990s or that austerity was increasing?

Tom G May 5, 2013 at 12:07 pm

Honestly this makes me sad.

“I don’t see the very bad effects. In the 1990s growth was strong even while “austerity” was increasing (falling red line) [as this sentence appears to be driving people mad do note that it is a factual description of the data from which I do not draw a conclusion]”

It significantly revised downward my prior beliefs on how much integrity and/or knowledge to expect on this blog.

The statement was clearly meant to imply that the 90’s experience was an argument against Paul Krugman’s arguments. The follow on clarification is what I expect from hack not one of my favorite blogs.

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