During late 2012, market monetarists like myself argued that fiscal austerity in 2013 would not slow growth. We based that on an idea that was relatively uncontroversial as late as 2007 (even among New Keynesians)—monetary offset. If the central bank targets inflation, or NGDP, or inflation plus output gaps, it will try to completely offset the effect of any change in fiscal policy on aggregate demand. But with the onset of the Great Recession both Keynesians and conservatives stopped believing what they previously believed. Suddenly New Keynesians thought fiscal stimulus was expansionary. Old monetarists started talking as if low interest rates meant easy money.
Early in 2013 both Mike Konczal and Paul Krugman
indicated that 2013 would be the year when market monetarism finally got tested. It was quite a test, as the actual fiscal austerity was even greater than the Fed anticipated when it adopted QE3 and forward guidance in late 2012. This point is uncontroversial; even Keynesians talk about the unprecedented drop in the cyclically-adjusted deficit in 2013.
We don’t yet have all the 2013 data, but it’s clear that market monetarism passed the test with flying colors. Job growth through November occurred at a faster pace than 2012. During the first three quarters of 2013, real GDP growth is running well ahead of the pace in 2012. These are the sorts of statistics usually cited by Keynesians as barometers of the effect of austerity on demand. Oddly, Keynesians don’t seem to understand their own (AS/AD) model. Real GDP is a lousy indicator of aggregate demand, as it can just as easily be affected by shifts in aggregate supply. The appropriate indicator of AD is not real GDP, nor is it inflation, it’s nominal GDP—total spending in the economy.
Mark Sadowski sent me to a recent post by Mike Konczal
. I was looking forward to reading his admission that Keynesianism had failed and that market monetarism was now triumphant. Thus I was disappointed by what I saw:
2013. The year we won the argument but lost the war. It’s better than losing both the arguments and the war, I suppose.
2013 brought us a fiscal deficit that closed far too fast, NGDP growth and inflation falling compared to previous years, and unemployment completely falling off the political radar at the same moment the argument that the deficit was a worry collapsed. Before there were elaborate arguments about how the unemployed were this or that, or uncertainty was causing the one thing and the other. Now it’s just quiet out there, yet the economy remains below potential. The collapse of the counter-Keynesian position didn’t revitalize a position of aggressive action; it just left a void.
That sure doesn’t sound like an admission of defeat. Inflation is of course irrelevant to this issue, but NGDP is the right metric—give Konczal credit on that point. Unfortunately he has the data wrong. NGDP grew by 3.8% between 2011:4 and 2012:4, and is growing by 4.0% so far during 2013 (the fourth quarter is also expected to be strong.) That’s not much better than 2012, but market monetarism wins even if the two numbers are about equal. The speed up in jobs, RGDP, and NGDP growth is a disaster for the Keynesian model, suggesting a near-zero fiscal multiplier. Monetary offset worked.
It doesn’t matter how often
John Cleese Eric Idle Michael Palin says the parrot is just resting; it’s still dead. And it doesn’t matter how many times Mike Konczal says that growth slowed in 2013—it accelerated. Keynesianism is not resting;it’s dead.
PS. I expect Paul Krugman to come up with a more plausible excuse. But will Keynesians stop claiming to be “reality-based”? Will they stop accusing conservatives of being “faith-based?” Don’t count on it.