Did the Federal Spending Cuts Slow Growth
One of Scott Sumner’s most important posts in the last few months is his November 8 post, “Mike Konczal: “We rarely get to see a major, nationwide economic experiment at work.”
Scott quotes blogger Mike Konzcal from last April:
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.
Before I go on, let me point out that what I like about Konzcal’s post is that he was willing to state a test of the competing views.
Paul Krugman also agreed with the test, writing:
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.
And 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.
Sumner summarizes the results of the test:
Yesterday I reported that RGDP growth in 2013 was running ahead of the pace for 2012, using either the official figures or the new Philly Fed GDPplus estimates. Today we received another strong jobs number, which means that employment gains in the first ten months of 2013 are running at over 186,000/month, versus less than 183,000/month last year and 175,000/month in 2011.
Given the predictions of the Keynesian model, anything even close to 2012 results would have been a win for MM [market monetarism]. The Keynesian model predicted a sharp slowdown from the higher income/cap gains/dividends taxes, payrolls taxes, sequester, government shutdown, etc, etc. But we are running ahead of 2012, and even if the last two months are weak we will be essentially even.
Scott’s commenter Mark A. Sadowski is worth reading also. Sadowski wrote:
In other words, according to these estimates [by the CBO and by the Federal Reserve], the sequester should have decreased employment by about 640,000 jobs, and the tax increases should have decreased employment by about 500,000, as of 2013Q3. That’s a total decrease of 1.14 million jobs.
Instead, employment was up by 1.7 million in 2013Q3 relative to 2012Q4. That’s a significant increase from the 1.4 million jobs created in the previous three quarters.
This is huge. It fundamentally undercuts Krugman’s version of Keynesianism. It’s kind of like the famous late 1960s debate between Milton Friedman and Walter Heller about monetary policy vs. fiscal policy.
Interestingly, even when Konzcal claimed in April that we had an experiment, I pointed out that the data from the experiment were already showing that budget cuts don’t seem to hurt the economy.