Budget Cuts Seem to Work
Washington Post blogger Mike Konzcal writes that we now have a test of monetary vs. fiscal policy. According to him, fiscal policy won. That is, fiscal policy is more potent and monetary policy is impotent. In fact the very data he cites show the opposite.
Here’s his key paragraph:
We rarely get to see a major, nationwide economic experiment at work, but so far 2013 has been one of those experiments — specifically, an experiment to try and do exactly what Beckworth and Ponnuru proposed. 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.
And what did the GDP report say? Konzcal links to fellow WaPost blogger Neil Irwin’s post about the GDP report. Irwin writes:
We’re still stuck in the muck.
That’s the conclusion to draw from the new report on gross domestic product. The U.S. economy grew at a 2.5 percent annual rate in the first three months of the year, which was an improvement from the weak 0.4 percent of the final months of 2012. But Friday’s report was nearly a percentage point below analysts’ expectations, and for the last six months, number averages to only a 1.45 percent annual rate of growth.
Hmmm. What happened in the first quarter of this year, the quarter in which growth rose? Oh, yes, we had cuts in government spending. Irwin writes:
Indeed, the biggest culprit in the weak report was the government sector, which fell at a 4.1 percent rate, after a 7 percent pace of decline in the fourth quarter. The fall was universal — at the federal, state and local levels. The U.S. government is in pullback mode, and whatever one thinks about reducing the size [of] government in the long run, for now it is unequivocally the villain in slowing growth. If there’d been no change in government spending over the last six months, GDP growth would have averaged a respectable 2.55 percent, not the current soft 1.45 percent.
But Irwin’s last sentence begs the question. It amounts to saying that the Keynesian model is right about fiscal policy’s potence. Certainly Irwin believes that and has a right to believe and write it. But Konzcal can’t rely on that if he wants to claim that fiscal policy is more potent than monetary policy. Konzcal is using what I call “proof by assumption.”
I titled this “Budget Cuts Seem to Work” because it’s important not to make too much of one quarter of data. But to the extent this is a test of the potence of fiscal vs. monetary policy, monetary policy proved more potent. So why, in the title, is my emphasis on budget cuts, rather than monetary policy? Because my reason for advocating budget cuts is to reduce the size of government so that people can choose what to do with their own income. A cut in government spending, by definition, will do that. But the fear of Krugman and many others is that budget cuts will throw the economy into a recession. These budget cuts have not. 2.5 percent growth is not great, but it’s not a recession and it’s not even stagnation.
Also, we can be sure that when someone spends his own money, he will get, by his standards, at least a dollar’s worth of goods and services for a dollar of spending. We can have no assurance that government will get a dollar’s worth of value for a dollar of spending. The reason: government is spending other people’s money. I wrote about this at some length in my article, “GDP Fetishism.” So when government spending on goods and services falls by a dollar and private consumption spending rises by a dollar, even if the effects of that on GDP are neutral, the effects on well-being are highly likely to be positive.
I notice, by the way, that Tyler Cowen has started using my term, “GDP Fetishism.” Thanks, Tyler.