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.


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