The Austerity Flip-Flop

On April 28, 2013 Paul Krugman clearly said that 2013 was a test of market monetarism:

But as Mike Konczal points out, we are in effect getting a test of the market monetarist view right now, with the Fed having adopted more expansionary policies even as fiscal policy tightens.

Yesterday (Jan 4, 2014) however, Paul Krugman, said:

…I don’t take seriously the claims of market monetarists that the failure of growth to collapse in 2013 somehow showed that fiscal policy doesn’t matter.

There are two obfuscations here. First, it wasn’t the market monetarists who established the test it was Konczal and Krugman who laid down the glove so Krugman is saying he doesn’t take his own (April) claims seriously. Second, in April Krugman did appear to take his claims seriously, perhaps because:

…the results aren’t looking good for the monetarists: despite the Fed’s fairly dramatic changes in both policy and policy announcements, austerity seems to be taking its toll.

Now that the results are in, however, Paul claims that compared to southern Europe American austerity wasn’t so bad or it was really bad but small enough to be offset by “other stuff”:

US austerity, although a really bad thing, wasn’t nearly as intense as what happened in southern Europe; it was small enough that it could be, and I’d argue was, more or less offset by other stuff over the course of a single year.

But the ticker tape (April 27, 2013) suggests a much different emphasis (note also that here Paul names “other stuff’ and it is adding to the problem not subtracting):

There is some tendency among economic commentators to think that austerity policies in a deeply depressed economy are mainly a European thing… But 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….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.

Even more amusingly, arch-Keynesian Paul Krugman now says we are approaching the long run! In a post titled What A Good Year Won’t Prove he says:

If 2014 is a year of relatively good growth, you know that many people will take that as somehow refuting Keynesianism — hey, didn’t you guys predict that the economy would never recover without fiscal stimulus?

No, we didn’t [the linked post, is from 2009, AT]

In the long run, we will have a spontaneous economic recovery, even if all current policy initiatives fail….

Now, to be fair, I happen to agree with Krugman that one test is not decisive. The economy is very complex and we don’t have controlled macro-experiments so lots of things are going on at the same time. But as one wise commentator put it:

…using hedged language doesn’t insulate you from consequences if things don’t turn out the way you were clearly suggesting they would, nor does the true point that sometimes the right model makes a wrong prediction. If your model led you to believe that inflation austerity was a “great danger” in 2009 2013 the fact that this danger never came to pass should substantially reduce your belief in that model – and should substantially reduce your credibility if you refuse to revise your beliefs.

Addendum: Scott Sumner has a similar reaction at Econlog.


I would think that large interventions in the economy, whether monetary or fiscal, probably have some effect. The effect is probably inter-related, complex, and also involves market participant expectations during a very uncertain policy period as well as the eventual policy implementations. Disentangling the various effects may not be possible.

The polarization of the macro-economic profession through this period is best seen through a political filter, with priors about the correct long term size of government deeply affecting the argument.

When you can't rely on limited data or simplistic models you are left with unsubstantiated axiomatic priors about how the political economy should work, and arguments about these priors couched in jargon designed to legitimate them.

Krugman keeps getting tripped up regarding his own biases about how the economy should behave versus reality. For years he's been peddling this narrative that inequality and budget should hurt growth and yet the actual data keeps slapping him in the face. Time to wake up to reality, krugster lol

The "actual data" says that for years growth has sucked, supporting Krugman's narrative. We are still way, way below potential.

GDP growth has returned to the pre-2008 rate and is still higher than all of Europe. Other data shows record S&P 500 profits & earnings and record high consumer spending and exports. This 'potential' an arbitrarily defined construct to justify more ineffective stimulus spending. Growth may not be

Yes, but inequality is higher in Europe.

LOL, someone tell Krugman and the Occupy movement

"S&P profits & earnings" - Are you channeling the President with his famous "profit and earning ratios"?

Actually, Krugman has explicitly stated that he does not believe that inequality is harmful to growth. In January 2013 he stated:

"Personally and politically, I would have loved to write a piece blaming slow growth on inequality. But I couldn’t and can’t convince myself that the theory and evidence really support that view. Inequality is a huge problem — but not for employment growth in 2013 or 2014."

Note both the awareness of his own bias and a rejection of the proposition even given this bias.

I hope that he confesses to getting it wrong regarding the "test of market monetarism". He should state that (a) he was wrong to suggest that a single data point rejects a theory and note the implications that this has for his criticisms of other people who got their predictions wrong and (b) that last year is evidence in favour of market monetarism.

It is frustrating that people involved in this debate are unable/unwilling to acknowledge the huge amount of uncertainty over which models are correct.

>>Actually, Krugman has explicitly stated that he does not believe that inequality is harmful to growth. In January 2013 he stated:

Yawn. Give him another year.

I don't think you read Krugman's work. He argues precisely the opposite. That is, he argues that inequality is NOT hurting growth.

See here: and here:

Oops, it looks like "weareastrangemonkey" beat me to it!

Austerians and inflationistas: Same banging, different drum.

If the economy is too big and complex to understand or predict, what is the justification for intervention? Why isn't "first do no harm" a principle for macroeconomists?

You are basically asking why an orange isn't an apple. Economics isn't medicine and an analogy isn't an argument.

He didn't make any analogies...

First do no harm isn't an analogy to medicine? Okay, if you say so.

He's correct, it isn't an analogy to medicine, it's a concept borrowed from medicine. Two different things.

Okay, I'll try again. Saying that the economy is too big and complex to understand (a dramatic oversimplification of this debate, FWIW) and therefore intervention is not justified is essentially a non sequitur, in the literal sense. The latter in no way logically follows from the former without further explanation. If you are borrowing a concept from medicine with essentially no attempt to explain why it should be applicable to economics, then you are implicitly arguing that medicine and economics are sufficiently similar that the concept would obviously apply to both and no further explanation is needed. Which I would call an implicit analogy, but please, keep splitting linguistic hairs. The point, again, is that there's no argument there. Just a "borrowed concept" (to use your preferred phrase) standing in for an argument.

Economics is marketing material for arguing for your preferred political policy. There is no science there. So don't expect humility, until economic predictions are actually seen to be falsifiable, and the falsification of their own theories are actually accepted by even the influential economists. (In this respect economics is similar to the String Theory vs Loop Quantum Gravity debates in what their practitioners call physics)

Outstanding work Alex! Very nicely done.

Krugman and other pundits have a professional reputation and a fan base to retain. Pundits can't be too generic or waffle with their opinions since they just become boring. Krugman can and does impress using his analysis of real data. Too bad the real economy isn't filled with frictionless spheriod bodies.

It's not so easy to cover your tracks with a magic hand wave when predictions go wrong but pundits can add an asterisk to their previous opinions. Sometimes admitting you are wrong can go a long way also.

It's 2014, Hollande is sending France down the drain with "pro-govt. growth" policies and there is talk of bringing back Sarkozy. The most annoying thing is that austerity Germany still hums along and the whole of Europe is trying to emulate Germany's success. You can't write off the success of Germany away even if you accuse them of being miserly sycophants of the EC/EU for not spending like no tomorrow as shown by the PIIGS.

The ultimate contradiction of Krugman is why he wasn't GWB's greatest supporter. He should have supported a perpetual Iraq war or Afghan war and a greater perpetual war in the Middle East and Central Asia. War is the greatest stimulus measure at all levels: it spurs "industrial growth," keeps people employed, redistributes cash from the rich to the poor (large contractors as an exception of course). Like all good, well meaning government programs, it ignores irrelevant, unpredictable, and unintended effects for future generations since what matters is the govt. sugar induced rush growth for the present. As his idol wrote, "in the long run we're all dead."

How does "sycophants" fit into that sentence?

Also, war as a wealth transfer from rich to poor? Lolz.

Save some of your lolz for Krugman: though he tries his best to give credit to the New Deal, his Great Compression in fact occurred between 1941 and 1944.

No, just no.

War spending is a highly unproductive use of expenditure. Building roads, power plants and libraries are all significantly better stimulus policies because they create infrastructure that increases future wealth.

nice roads and libraries don't do you much good when they are blown to smithereens by terrorists. Defense spending got America out of the great depression, not the New Deal.

War spending carries the substantial opportunity cost of all the consumer and capital goods that never came into existence because resources are being diverted toward the military state. Foregone production of capital goods translates into less production in the future.

Sure the United States may very well have been justified for entering WW2. Even if we saved ourselves from even higher costs, the war was still a net loss, never less a stimulus package.

Unless it's against an imagined invasion from outer space.

Depends on what you mean by "got America out of the great depression". I'd say that a reduced unemployment rate isn't terribly impressive when you force millions of men to fight overseas and women are forced (yes, I know, they were happy to do it....doesn't change my point) to leave the home to work supporting them, and that billions of dollars spent to support the destructive war effort, all the while forcing the entire economy to ration any number of consumer goods is a far cry from anything remotely resembling a healthy economy. What really "got America out of the great depression" was the boom of domestic private investment that occurred a couple of years after the end of the war, and its subsequent "off the cliff" drop in government spending. And this brought a large increase in all sorts of economic activity despite the dooms-day Keynesians loud predictions.

Subject of course to the usual Krugmanian proviso about how at the zero lower bound, black is white.

"should substantially reduce your credibility": in the case of Krugman that outcome would violate the Third Law of Thermodynamics.

The dismal science indeed. You should all be ashamed of yourselves.

This blog post is predicated on the assumption that the economy is getting stronger. It's not--we just have easier comps.

4.1% GDP growth is easy after years of stagnation. Stock market rallies are inevitable with easy comps and cheap buybacks.

Fiscal policy is the biggest red herring if there ever was one--arguably, you could say the GDP growth rate would be higher if government spending was higher (in fact, that seems a truism that the ideologically blinded libertarians don't seem to understand).

This post is nonsense. It's just easy comps.

You have a point (I keep on sustaining that the law of diminishing returns is one of the most difficult and ignored concepts around) but you need to take it out on Krugman, not on Alex; for it was he and not Alex who made the argument you are critisizing


I read the articles that Alex cited to, and what he did was snip and cut, making a scrapbook and leaving out the qualifiers. I originally started A VERY long excerpt from each of the articles to show this, but in moving between browsers, lost the content.

I would encourage anyone to read the articles behind the cuttings...what you will find is the first article saying that austerity has hurt, Krugman and others saying that we are below potential and that no oompf at the zero bound, other than asset inflation (with wealth effect for the wealthy), reduced spending hurting employment, etc.

Thanks, Bill--a shame you lost the content; sounds like it'd be a great read.

That is highly misleading. The most important quote in the above article is:

"But as Mike Konczal points out, we are in effect getting a test of the market monetarist view right now, with the Fed having adopted more expansionary policies even as fiscal policy tightens."

I have read that article and this quote is in no way deceitful. It is the important quote because it is where Krugman claims that growth over the last two quarters is a test of market monetarism. He then tries to distance himself from that claim in the later articles. He should not do so. I respect Krugman and hope that over the next week or so he can bring himself to do what he has applauded in others and say that he was wrong, if he does not do this I believe many people who currently respect him will lose a certain degree of respect.


This is what Konczcal said, and is not in support of monetarism, but rather increased fiscal activity, and also supporting his claim that fiscal austerity held back the economy despite monetary stimulus: Here are some quotes:

"If you look at macroeconomic policy since last fall, there have been two big moves. The Federal Reserve has committed to much bolder action in adopting the Evans Rule and QE3. At the same time, the country has entered a period of fiscal austerity. Was the Fed action enough to offset the contraction? It’s still very early, and economists will probably debate this for a generation, but, especially after the stagnating GDP report yesterday, it looks as though fiscal policy is the winner."

Konzcal then goes to show how fiscal caused a greater contraction that monetary policy had to offset:

Going forward, he argues for more stimulus:

"But the most important lesson to draw is that fiscal policy is incredibly important at this moment. In normal times, the broader effect of government spending, or the fiscal multiplier, is low because the central bank can offset it. But these are not normal times. It’s not clear why the Federal Reserve’s actions haven’t balanced out fiscal austerity. But since they haven’t, we should be even more confident that, as the IMF put it, “fiscal multipliers are currently high in many advanced economies.”

These multipliers work in both directions. As spending benefits the whole economy more in these times, austerity is also much more vicious than it would normally be. Using fiscal policy also avoids the expectations problems that plague monetary policy. When President Obama signs a law promising spending, the public believes the government will spend. That's not so with the Federal Reserve, where a random statement from a Federal Reserve governor can cause markets to doubt the Fed's long-term commitment."

It is not what Konczcal said. It is Krugman citing Konczcal and agreeing with him that this will be a test of market monetarism. The issue is that Krugman set up a criteria by which to test something then when the test results came out he tried to deny that this was a test of market monetarism. Krugman needs to either say that (a) market monetarism passed this test or (b) he was wrong to suggest that this was in fact a test. If the economy had shrank in the last two quarters Krugman would be pointing to the article above and saying how it vindicated his position and showed market monetarism to be wrong.

The above post and the debate pertaining to it is not a debate about the current state of the economy. Nor is it directly a debate about fiscal vs monetary policy. It is about Krugman holding himself to the same standards that he claims others should be held. Time and again he has criticized others when they have made predictions who did not admit that it was a problem when their predictions did not come to pass. As I said, I respect him as an economist and a public figure but he has to fess up on this issue or he will appear to be (will be) a hypocrite.

It could also stand to be pointed out that final sales are still noticeably lower in 2013 than in 2012. Not sure how great improved headline growth is when it's largely attributable to inventory accumulation, though charitably one could say that it's due to expectations that the economy will improve.

I agree with Michael, consider the pre-recession GDP trend line and ask how far we are from there? The answer is still pretty damm far. Granted if you're just looking at unemployment, we don't look too bad from that baseline (but unemployment isn't capturing the decline in the labor force participation rate, the difference between current GDP and trend does).

One could argue that a supply shock has put us on a different GDP trend line but as I pointed out in the previous post the only way to establish that is to exhaust stimulus by pushing it until it no longer increases GDP and employment with no impact on inflation or long term interest rates.

The point of the post, that Krugman is a hack, still stands.

Or is the point that some people here care less about the economy and more that Krugman gets all the Nobel's, NYT columns and econ-groupies (don't know what they would look like but I shutter to try to imagine)?

I like it when people no this blog talk about economics instead of their blind hatred for Paul Krugman.

But doesn't everyone agree that pre-recession GDP was a bubble? Why would you expect that to continue in any alternative scenario?

No, everyone agrees housing prices were a bubble and a bigger bubble were the financial instruments Wall Street created out of mortgages. That, however, was not the GDP of 2007. GDP is the sum of all goods and services produced in an economy over a period of time.

No evidence has been presented that GDP was in a bubble state but a simple test is available to see if that is the case. Stimulate until you hit inflation and/or long term interest rates rising with no increase in employment or real GDP.

Nope. In 2007, lots of people were swimming naked. Then the tide went out.

Household leverage data confirm this.

Lol, so a component of GDP was certainly in a bubble, yet GDP itself can not be evidenced to have been in a bubble. This makes no fucking sense.

Actually GDP is the sum of all final goods and services, not all goods and services.

No one is arguing that current economic performance is good. Krugman and Konczal argued that fiscal contraction would make things even worse. Sumner (among others) countered that monetary policy would keep things on current trend. They also argue that better monetary policy would enable 'catch up' growth.

There is no "trend line". That's just a made up thing you draw on a chart you create. It has no meaning in the real world. There is no logical reason why growth should continue at the same rate from year to year.

Draw a line from 2001 to 2013 GDP and wow, we're exactly on the "trend line"! 2008 was a little above and 2009 was a little below, but steady as can be.

Mean reversion, man, magic wand!

Krugtron's cloak of invincibility apparently doesn't hold up to scrutiny and now more and more people are waking up to the fact he has been wrong about many things, such as how the US economy is thriving despite budget cuts, European recovery in the face of Austerity, the Eurozone remaining intact, bitcoin, etc. Bernnake, Bush & Paulson deserve credit for the post 2008 stock market & economic boom; Obama's stimulus contributed negligibly, at best. Thank the tireless US consumer for spending when the pundits wrote them off, the reliable bond holder for not selling when hyperinflation seemed 'inevitable', and congress or passing the bailout.

"When the facts change, I change my opinion. What do you do, sir?" - JM Keynes (LOL, what a classic CYA quote) - very useful website on stock market gurus and how accurate they are (not very)

For businesses: “Price, quality, or service". Pick two. For economists: "magnitude, time or accuracy". Pick two.

I believe, and your comment confirms, that there are two personality types attracted to economics.

1. The empirically-minded, science-loving, amoral intellectuals. These people embrace the scientific method and the ability to change viewpoints in light of new information.

2. The religious fanatic. These people want an authority, an objective truth from God (or the Invisible Hand or whatever) that is pure and perfect.

I'll let you guess who is who.

Well, mostly, the people who are in the first category believe in the 'Invisible Hand'. I'd go back to work on your thesis.

Useful categories. Clearly, I am type 1. People who disagree with me are type 2.


The test was insufficiently specified.

What's the counterfactual?

Scott Sumner thinks 2012 is, and by that standard of course the results are "obvious." But that doesn't seem useful. Ceteris, paribus, and all that rot.

Krugman, I think, is comparing 2013 to an insufficiently specified idea of what's happened in previous recoveries. By this comparator, you can say quite accurately that 2013 has been tepid at best. By several different measures, starting with unemployment measures.

As Sumner notes, '13 growth was higher than '12, despite fiscal austerity that was greater than it was in 1937, when the Great Depression kicked off a new crash. The difference wasn't "stuff", it was monetary policy.

And when you consider the tepid growth of the past 16 or so years outside of that created by bubbles, what does that do to his trend?

I agree with Krugman on a lot of things, but the mental contortions he uses to to insist on monetary impotence at the zero bound just boggle my mind. And for him to suggest that maybe the long run has finally arrived is just icing on the is-this-a-joke cake.

because then he would have to give credit to republicans for engineering the recovery in 2008

You are wrong Far from insisting on monetary impotence, PK supported Bernanke's extraordinary measures. He just said they probably wouldn't be enough. And he looks to be right. Growth is positive, but low compared to previous recoveries, and GDP is way below potential.

How do you define potential?

Yes, it's true that if pressed, Krugman on occasion said he was in favor of more monetary stimulus. But the fact of the matter is he spent way way way more time and energy pushing for and talking about fiscal policy, liquidity traps, the zero lower bound, the revival of Paleo-Keynesian economics, why the '09 stimulus was too small, etc. than he ever did talking about how to make monetary policy work at the zero bound. And because of this he has become seen as THE preeminent economic pundit in favor of old style Keynesian fiscal stimulus.

The public's perception of your views depends not just on exactly what you've said, but what topics you choose to focus on repeatedly and how forcefully you push them. It frustrates me when Krugman gets coy this way. He doesn't explicitly say monetary policy is always impotent at the zero bound, he just heavily implies it and then talks about fiscal policy ALL THE TIME.

Maybe, just maybe the fourth quarter numbers were good because the US federal government was shut down for 15 days. Just think how much better it would have been if it was shut down for a month!

Read the BEA metadata on how it computes GDP. Because the furloughed employees got paid, even though they didn't do any work that week, they contributed to GDP dollar for dollar of their income. Shut the government down for a year but still pay the furloughed employees.

4.1% of gdp worth? They would have been paid anyways.

I would suggest it is what they didn't do for those two weeks. When there aren't bureaucrats around to say no, economic growth happens.

Now that the results are in, however, Paul claims that compared to southern Europe American austerity wasn’t so bad or it was really bad but small enough to be offset by “other stuff”:

What I'm not seeing is any evidence that Krugman ever claimed the austerity of Europe, esp. Southern Europe was equalled by austerity in the US. For example, back in Sept. 2012 ( he was asserting European austerity was pretty bad. Back in May 2012 some European commentators likewise were asserting that Krugman was harping on Europe for implementing far too much austerity (see, for example,

Alex tries to paint a picture of a flip-flopping Krugman once claiming US austerity was worse than Europe's now claiming the reverse. Yet the ticker-tape really shows the opposite, Krugman consistently claimed Europe's austerity was much worse and much more counter-productive than the US's.

It may be fair to point out that Krugman in the past emphasized the harshness of US austerity and now seems to be shifting his tone by claiming that US austerity has started to end. This may be perplexing given that Congress is letting tax cuts expire, the stimulus program has ended and the deficit has been falling. But previously Krugman asserted that austerity should not be measured by gov't spending divided by GDP but gov't spending divided by potential GDP (a decreasing number equals increasing austerity and vice versa). A look at that graph updated ( seems to indicate that while fiscal stimulus hasn't returned the increase in austerity has indeed stopped.

Not sure that's what he's really trying to say. It seems to me from my recollection that Krugman's claim was that the "austerity" (not passing a $10 trillion "stimulus" is austerity to people who measure growth by comparing the economy to the "potential economy" and think reductions in spending growth are "spending cuts") we had in the US would be disastrous, irrespective of whether it was as large as the Euro "austerity" (in fact I now see "smaller than in Europe, but not by that much"). And now he's saying, see I was right it was a bad thing but my correctitude is obscured by other stuff (the way every wrong prediction of macroeconomists is claimed to be, funny how they never seem to realize the implication that their models are worse than useless because there's ALWAYS "other stuff" which far outweighs the predictive power of their models).

Also, just a general note, it's usually a bad sign when someone starts getting pre-emptively defensive and explaining why the evidence that would appear to prove them wrong doesn't actually prove them wrong.

I'm not sure why you're trying to recollect what Krugman said when I bothered to look it up and link to it. He defined austerity in an objective manner, a few years ago austerity was indeed increasing in the US and now it has ceased to increase. I see no evidence that he ever said US austerity was more severe than European austerity and none has been presented here.

No one ever claimed K. said that austerity in the US was as bad as in Europe. Read the post again.

No one ever claimed K. said that austerity in the US was as bad as in Europe. Read the post again.

I read it several times, what is the meaning of this:

Now that the results are in, however, Paul claims that compared to southern Europe American austerity wasn’t so bad or it was really bad but small enough to be offset by “other stuff”:

Krugman, all along, asserted Europe's austerity was much worse. The above, though, seems to imply that Krugman has suddenly changed his tune.

To accuse someone of making a flip-flop is a charge that implies something very specific. Yet the language of this post seems very fuzzy and vague. If Krugman said American austerity wasn't as bad as European, that's not an assertion that American austerity was no big deal.

As often happens, when you look at what Krugman actually said he seems to have remained pretty consistent and coherent all the way through. The charges of hackery, flip-flopping, and so on, though, seem to almost always depend upon some critic playing predantic word games acting less like he is having a conversation about economics and more like he is a prosecutor trying to trip up a witness on a very minor technicality.

The problem Krugman faces is that If "stuff" (whether or not that includes monetary policy) is now sufficient to counter massive austerity, then why do we need fiscal stimulus? Let's have more "stuff"? Budget deficit crashing, growth accelerating...what's not to like?

Larry: What's not to like? Easy. Comps.

Really? GDP is the highest ever and the "comp" is last year's GDP which was, you guessed it, the 2nd highest ever.

The damage from austerity remains, Krugman's post simply says the worst is over because austerity has ceased to increase. The fact that there's a massive gap between current and potential GDP indicates that monetary did NOT counter austerity. I'm sure Krugman would not object to reinstituting the payroll tax cut, extending unemployment benefits, or doing another round of infrastructure spending. The economy is still is operating below it's potential and I doubt he ever asserted 'other stuff' made up for that. At this point, though, he is probably just happy that we've stopped making stuff worse.

Could monetary policy have been ramped up even more to test whether or not it could counter fiscal austerity? Sure, the Fed could have expanded QE by purchasing bonds of auto loans, consumer credit card loans, maybe even randomly purchased stocks. At a certain point, though, that starts looking less like monetary policy and more like fiscal policy. What is the difference between the Fed 'dropping money from a helicopter' and the government doing another stimulus bill other than actual elected officials have a say on who benefits from the stimulus bill?

well done

the closing sentences and quote nail it

It would have been a much more impressive test had market monetarists announced at the start that the monetary policy adopted would still be inadequate to the goal of substantive recovery. Monetary policy may not be ineffective but if backers can never say how much is enough or that what we have is not enough then how seriously should we take it.

Two issues muddying the waters here. Central banks are not actually following a nominal targeting rule, yet. Hence there's a lot of "making do", given the present monetary policy. And also, the previous trend level has not been fully addressed, for no one agrees whether the earlier trend level "should" be abandoned, or what caused a worldwide drop in nominal spending.


Market Monetarists did "announce at the start that the monetary policy adopted would still be inadequate to the goal of substantial recovery."

Our expectation was that we would get the anemic recovery the Fed's approach is generating regardless of fiscal stimulus or austerity.

But no Market Monetarist believes that the Fed has to do monetary offset.

And Market Monetarists want the Fed to generate a more rapid recovery. We believe that this could be done without fiscal stimulus and despite fiscal austerity.

However, I think most Market Monetarists believe that unexpected fiscal stimulus or austerity can have some effect on spending on output. But _if_ the monetary regime has a level target for spending on output, these effects will be small.

I have very mixed feeling about this. As a gotcha to the insufferably smug Krugman it works ok. He said it was a test and if it turned out the other way I'm sure he'd be crowing. Gotchas to insufferably smug people are fine.

But it does essentially nothing to advance the state of macroeconomic understanding because of the good points he makes: the recovery is ridiculously tepid, unemployment being down has a frightengly large component of discouraged workers, we can't all be net exporters etc. The MMT sages can't even agree on what a good test would look like. That of course puts them on par with Krugman, which I'm sure makes them feel great, except to outsiders it suggests that the whole field might be mumbo jumbo. At this point both sides appear to be saying that the tepid recovery is because their pet theories only got half measures.

Really it seems obvious as the sky is blue that there could never be such a test, because the effect of fiscal/monetary policy cannot be measured independently of the effect of either unpredictable uncontrollable events (technological and commercial advancement, natural disasters, etc) or non-fiscal/monetary policies (mass importation of unskilled third world labor, weak trade policy losing entire industries to China, the health insurance law, Keystone XL pipeline, etc). Was the 90s boom/bubble due to fiscal/monetary policies or, say, the Internet? Was the 2000s boom/bubble due to fiscal/monetary policies?

Arguing about fiscal/monetary policy seems to be like arguing over whether Spiderman or Batman would win in a fight. The simplest answer seems to be that we need to keep interest rates at zero pretty much forever or the government debt service burden will quickly go asymptotic.

Or rather I should say it's like arguing about how many championships LeBron would have won if he stayed in Cleveland. There is a right answer, I suppose, and plenty of data to put forward but how could you ever tell?

How does a guy who posts this intelligently and well turn around and post elsewhere like a 17 year old Klansman?
Are you bipolar? Are you another 'mike'?

Hilarious analogies. Love it.

What a good year did prove: a counterfactual look at U.S. GDP for 2013, and the same math successfully applied elsewhere and elsewhen for both Spain and Greece (and we only did the math for just the three countries last year....)

@Ironman: from Ironman's link: "we're going to put our Keynesian-style GDP multiplier tool to the test" - LOL! I bet that multiplier changes to backfit the data...making it about as useful as a weather vane to predict future wind directions.

We just used the latest estimates published by the Fed and Romer & Romer - the same multipliers for all three countries.

But you're right, in that we only considered a limited number of factors (others turned out to be irrelevant for the periods in question.) The same is not true today, so the predictive value of what we did has gone away (or at least, we would now need to incorporate those other factors to have a decent model.)

@Ironman--well at least you're honest. I half expected you to say that your model is predictive of future growth, in which case I would have rebutted this by saying you're wasting your time publishing this to the world when you should be making money by keeping it a trade secret and speculating in the futures market.

As for counterfactuals, it depends on how sensitive your parameters are to feedback--are they constants or not? Linear differential equations with constant coefficients are easy to solve, whereas partial diff eqs are sometimes impossible to solve in closed form. For example, as I state on my blog, if Hank Paulson did not rescue the markets in September / October 2008 would the markets freeze up even worse than they did? It's hard to say, since arguably the markets froze because rumor was circulating that the government would make whole all players with bad paper. Hence nobody wanted to trade any paper until such time the rumor was confirmed (and it turns out the rumor was accurate--Goldman Sachs and others made 100% on the dollar on their bad Lehman-backed paper). So the counterfactual is hard to disentangle from the actual events. The same holds in a non-cartelized, non-central bank economy such as the US economy in the Panic of 1907, with JP Morgan supposedly saving the economy from ruin by personal guarantees, and also the yeoman efforts by Salmon P. Chase to shore up the US Treasury during the US Civil War, etc etc etc. It's hard to say what would have happened 'but for' these efforts. So eventually what actually happened gets associated in the public conscious with certain events, and a mythology ensues, such as "the bailout saved the US economy from collapse" in 2008 (but note credit default swap rates did not peak until Feb. 2009, when the stock market reached its lowest point, so arguably the bailout did not stem the panic, if credit default swap rates are used as the proxy, as well as stock market indices, unless you assume in a counterfactual that the panic of 2008 would have led to an even worse economy in 2009 but for the bailout).

One often overlooked but in my mind very important salvation was the suspension of strict mark-to-market accounting for loan values in March of 2009. The stock market stopped falling and starting going back up literally that same week.

It was insane that banks had to value loans every quarter based on what they could sell them for, when in a panic you couldn't sell even perfectly good ones for pennies on the dollar.

The old relaxed rules were put in place in I believe the mid 1930s, and they worked just fine until they were made way too strict in 2007. Even the S&L crisis was a footnote because of the relaxed rules. Then what happens right after the rules were tightened? And what happened right after they were loosened? Brian Wesbury at First Trust has written a lot about this.

Great, Alex. Now please have a similar go at Tyler's vague predictions and hedged language.

Pope Paul is acting like the typical leader of a religion.

Awesome, Alex T. Bringing in Krugman's stuff from April 27 was the value-added in this post; I don't think anybody else caught that.

Everything Krugman says is pure whiny drama. I don't understand why anyone takes him seriously.

He makes liberals feel good about themselves by telling them they are always right about everything. Statists therefore take him very, very seriously.

Also, he is very highly paid for providing that service. This makes him a sort of God to econ majors everywhere, whose job prospects typically involve landscaping and fast food. They also take him very, very seriously.

The rest of us can just laugh.

Economics as Astrology

I can't believe it comes to ME to defend Paul Krugman, but so be it. First, it is clear that Krugman was wrong on his estimation of the effectiveness of monetary policy circa 2013. Fine. However, what he is is saying in the subsequent quote Alex gives is that FISCAL policy still matters. There is no contradiction in those two statements. Proving that I can kill someone with an M-16 doesn't mean that AK-47s don't matter.

The economy is very complex and we don’t have controlled macro-experiments so lots of things are going on at the same time.

Which means our economic gurus have no idea what they are doing, but they are spending a lot of time and money trying to demonstrate that they do know.

Paul Krugman
“…Incidentally, these other factors are why I don’t take seriously the claims of market monetarists that the failure of growth to collapse in 2013 somehow showed that fiscal policy doesn’t matter. US austerity, although a really bad thing, wasn’t nearly as intense as what happened in southern Europe; it was small enough that it could be, and I’d argue was, more or less offset by other stuff over the course of a single year…”

This is a testable claim. I will assume by “southern Europe” he means the GIPS. By “intense” I will assume he means the amount of fiscal austerity in any given year.

Using one of Krugman’s favorite measures of fiscal austerity, the change in the cyclically adjusted primary balance (CAPB) from the IMF Fiscal Monitor, the CAPB increased by the following amounts in the US, the Euro Area, the GIPS as a whole (weighted by potential GDP using IMF estimates of potential GDP), Greece, Italy, Portugal and Spain in 2010 through 2013:


Note that Greece, Italy and Spain started fiscal austerity in calendar year 2010 and the US, the Euro Area as a whole and Portugal started a year later. Note also that US fiscal policy was only less austere than the Euro Area as a whole in 2011. And finally note that 2013 was the first year that US fiscal policy was more austere than the GIPS, but that the intensity of its austerity in 2013 was as great as the fiscal austerity in the GIPS in 2012 which was the peak year for fiscal austerity for those nations as a group.

Looking at the individual GIPS nations we see that the level of fiscal austerity in the US in 2013 was less than that in Greece in three out of four years, was greater than the worst year of fiscal austerity in Italy which was 2012, was greatly exceeded by Portugal only once in its one truly horrendous year of fiscal austerity which was 2010, and was slightly exceeded by Spain’s worst year of fiscal austerity which was 2012.

I am gratified that Krugman seemingly acknowledges that the US fiscal austerity of 2013 was greater than anything that the Euro Area has ever experienced as a whole. However, I think by objective measures, measures Krugman himself uses, the intensity of fiscal austerity that the US experienced in 2013 is also as intense as the worst year of fiscal austerity experienced in southern Europe as a whole.

Using one of Krugman’s favorite measures of fiscal austerity, the change in the cyclically adjusted primary balance (CAPB) ...

The measure that I cited from Krugman was taking total gov't spending and dividing by potential GDP. If you recall your Keynesian theory 101 you might remember something called the 'balanced budget multiplier' which means that even if you do stimulus that is 'paid for' with equal tax increases you still get stimulus. Simply looking at the change in the budget deficit each year will miss that (although that measure does seem to not capture stimulus in the form of tax cuts). On the other hand, it would read keeping spending constant in as less austerity if actual GDP falls dramatically and vice versa in the event of a recovery. Not sure if that data is available for Europe or GIPS.

I'm wondering for your analysis of GIPS if you perhaps should weigh the countries by population or GDP since Spain is a larger country than Greece.

"The measure that I cited from Krugman was taking total gov’t spending and dividing by potential GDP."

The biggest problem with using that particular measure is that the BEA, which estimates the National income and Product Accounts (NIPA), did a mjor revision of GDP in July. The CBO, which estimates potential GDP has not revised its estimates since January of last year. The CBO was scheduled to release dramatically revised potential GDP estimates in November but that apparently has not happened. Thus your graph combines revised GDP with unrevised potential GDP and it's liely to be off by the 2% or so of GDP that intellectual property investment added to revised GDP across the board in July.

"If you recall your Keynesian theory 101 you might remember something called the ‘balanced budget multiplier’ which means that even if you do stimulus that is ‘paid for’ with equal tax increases you still get stimulus."

The balanced multiplier is based on the idea that the spending change multiplier is larger than the tax change multiplier. But the fiscal changes in 2013 were approximately 70% tax increases. Even with the smaller multiplier measuring the effect of last year's fiscal changes by looking at spending alone is bound to underestimate its relative effects. This can be verfied by looking at the actual numbers from your graph (although they are defective).

You'll note that the reduction in total government expenditures as a percent of potential GDP fell from 37.0% in 2010 to 35.8% in 2011 to 34.8% in 2012 to 33.9% in the first three quarters of 2013. In short your measure totally misses the huge increase in fiscal austerity in 2013.

"Simply looking at the change in the budget deficit each year will miss that (although that measure does seem to not capture stimulus in the form of tax cuts). On the other hand, it would read keeping spending constant in as less austerity if actual GDP falls dramatically and vice versa in the event of a recovery. Not sure if that data is available for Europe or GIPS. I’m wondering for your analysis of GIPS if you perhaps should weigh the countries by population or GDP since Spain is a larger country than Greece."

In my opinion the most objective way of measuring fiscal policy stance is the change in the general government cyclically adjusted balance, particularly the cyclically adjusted primary balance (CAPB). The cyclically adjusted balance takes into account any changes in the general government budget balance due to the business cycle. Thus changes in the cyclically adjusted balance are mostly due to discretionary fiscal policy, and consequently may be taken as a proxy for the degree of fiscal stimulus. The CAPB goes a step further, factoring out changes in net interest on government debt and thus ensuring that practically all of the changes in fiscal balance are discretionary in nature. The best place to find CAPB data is the IMF Fiscal Monitor. You can find the CAPB on the bottom half of Table 2 on page 70:

Furthermore you'll note that I clearly stated that my estimate for the GIPS as a whole is weighted by the IMF's estimate of potential GDP for those countries.

The cyclically adjusted balance takes into account any changes in the general government budget balance due to the business cycle. Thus changes in the cyclically adjusted balance are mostly due to discretionary fiscal policy, and consequently may be taken as a proxy for the degree of fiscal stimulus

Or is this the degree of purposeful fiscal stimulus? Automatic stabalizers are indeed stimulative even if they are not purposefully passed in response to a recession.

Automatic stabilizers are endogenous to the state of the economy. Were one to include them it would serve to overstate the degree of fiscal stimulus and fiscal consolidation. This is precisely why cyclically adjusted measures of the general government balance are preferred.

One way of calculating general government spending as a percent of potential GDP would be to use the IMF's estimates of potential GDP. This can be derived from their estimates of the output gap. Here is general government spending as a percent of GDP and the output gap as a percent of potential GDP from 2009 to 2013 for the US and the GIPS:

And here is the same data for the Euro Area:

Doing the arithmetic yields the following shares of potential GDP for general government spending in 2009 and 2013 and the change:

Spain------ 45.3--42.6---2.7

This measure shows that US general government spending has decreased by over twice as much as a percent of potential GDP as in the Euro Area as a whole, and by significantly more than the GIPS as a whole. When compared to the individual countries, US general government spending has decreased by three times as much as in Italy, and significantly more than in Portugal and Spain. Only Greece's spending reductions exceed those of the US, and by a very wide margin.

The spending reductions in the US relative to the Euro Area and the GIPS as a whole, as well as with relative to Italy Portugal and Spain are even larger when one takes into account the lower initial share. of potential GDP of spending in the US.

Is this gov't spending on goods and services or total gov't spending including transfer payments for things like social security, unemployment etc.?

It's "total general government spending" (click on the links) because the intent was to replicate your (attempted) measure for the US using internationally comparable data.

Besides, if it were only "government spending on goods and services" do you really think it would be 37-58% of potential GDP?

" was small enough that it could be, and I’d argue was, more or less offset by other stuff over the course of a single year."

Other stuff that was in no way helped by austerity, of course. Take my word for it and move along.

An Aquaponics garden may be set up indoors or outdoors inside the backyard.
Nutrient wastage is eliminated because the lake is cycled
through different tanks continuously. Bacteria for example nitrobacter are equipped
for breaking down the ammonia which is being continually
made by the fish.

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