Another disappointing reaction to The Great Market Monetarist Experiment
By Scott Sumner
In a recent post I discussed how Keynesians like Mike Konczal began the year claiming that we were going to have a test of market monetarism, and specifically the doctrine of “monetary offset.”
[As recently as 2007, monetary offset (roughly zero fiscal multiplier) was standard new Keynesian doctrine, and yet by 2010 some bloggers were calling the concept “the Sumner critique.” The fact that it had become so unpopular that they had to name it after a lowly Bentley professor speaks volumes about the recent decline of macroeconomics.]
Back in April 2013, Paul Krugman agreed with Konczal:
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.
Now the results are in and they show that market monetarism easily passed the test, as growth in 2013 is exceeding the pace of 2012. We know how Mike Konczal reacted, but what about Krugman? Today we got an answer:
One way to look at the US economy in 2013 is that it was, in effect, trying to begin a strong recovery, but was held back by terrible federal fiscal policy. Housing was making a comeback, state and local austerity was, if not going into reverse, at least not getting more intense, household spending was starting to revive as debt levels came down. But the feds were raising the payroll tax, slashing spending via the sequester, and more.
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.
Where do I begin? Yes, growth did not “collapse” as the Keynesian model predicted. It increased. So say so! There was a dramatic reduction in the cyclically adjusted budget deficit, by any measure. I’m tempted to point out that a reduction in the cyclically-adjusted budget deficit (including the exact same 2% boost in the payroll tax) is what the Keynesians claim caused the severe 1937-38 depression. And yet growth accelerated in 2013. Or I could point out that the fiscal austerity in the US was just as intense as in the eurozone, whereas the unemployment rate in the US has fallen sharply since 2010, while the rate in the eurozone has risen sharply. The key difference was monetary policy, which was much tighter in the eurozone.
But none of this really matters, does it? Paul Krugman was the one that said 2013 was a test of market monetarism. He’s the one who said it was a test of whether monetary policy could offset the drag of fiscal stimulus. And now the results are in. And what is Krugman’s response? I can’t quite tell, but it almost seems to me that he’s denying that any test took place. Suppose real GDP had fallen at 1% instead of rising at 2.5%? Would he still be saying that no test took place in 2013? Would he say market monetarism didn’t fail the test because “other things weren’t equal?” Or would he say that a test did occur and market monetarism failed? I’ll leave that question to my readers. But if you are interested, I have another post that cites Krugman criticizing other economists who failed to admit they were wrong.