David Beckworth links to my response to his graphs the other day which allegedly showed a problem for fiscal stimulus, which were widely criticized by people.
Recall I had presented a downward trend in total government spending. He responds by presenting the same downward trend in growth of federal government spending only (I'm not sure why just federal) and total federal dollars (again, I'm not sure why just federal).
So he's basically presenting the same data I did - the trends are the same. I guess he sees something different in it. He writes: "Daniel, on the other hand, thinks if we put the variables on the same scale all is well. No, here are total federal expenditures and NGDP in the same growth rate form and in dollar levels. In both cases, total federal expenditures have been trending down since 2010."
I don't understand what he thinks this demonstrates. NGDP has been stable because at the same time government spending has been decreasing, investment spending has been increasing. Of course we could be on trend and eliminate unemployment if both were increasing.
He seems to think the argument is that if government spending falls NGDP will wall no matter what. That's not the argument as far as I know. Think of the immediate post-war period, for example. The argument is that the fiscal multiplier is positive - that if you increase government spending NGDP will increase relative to what it would have been (at a time like this, of course).
Beckworth obviously hasn't shown such a thing.
If Beckworth wants to explain why the increase in investment that has helped keep NGDP stable was caused by the decline in government spending or would somehow be threatened by an increase in government spending then my claim would be in trouble. But I think that's a very hard argument to make right now.
Saturday, December 8, 2012
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Beckworth's graphs hardly disprove the Keynesian policy prescription of counter-cyclical fiscal policy. It could simply be that market expectations have been steadily improving, and private autonomous expenditures are responsible for the current level of NGDP. To concur with you, Daniel Kuehn, the level of unemployment could be lowered if a large fiscal stimulus was enacted.
ReplyDeleteHe also seems to think there is some kind of either/or we're facing between stabilization by the Fed vs. benefits of fiscal policy. Of course a big reason why NGDP has been growing stably (aside from the recovery that would have occurred in some fashion) is because the Fed wanted it to (and it's not up to NGDP trend because the Fed doesn't want it to be). None of that shows fiscal policy is a bad idea. And none of this says anything about fiscal policy efficacy without a plausible counter-factual.
DeleteUnless his argument is the Fed can counteract any fiscal reductions and maintain ngdp so fiscal policy is unimportant and the austerity slope doesn't matter.
ReplyDeleteAnd he can make that argument - and it's a reasonable one - but that doesn't really say fiscal policy doesn't work - it says central bankers counteract good fiscal policy. And the graph still doesn't tell us that.
DeleteDaniel,
ReplyDeleteMeant to reply to you earlier. My original post could have been clearer as to the main point I was originally making, so let me try to clarify here.
My main point was that the fiscal policy multiplier, even if it is large, is usually offset by Fed actions. In this case, the fiscal contraction was being offset by the Fed ability to keep private spending stable. So my claim that the fiscal policy multiplier was low was in this context, not in its full potential.
A secondary point is that we are far from full employment and contrary to Keynesian thinking, fiscal contraction does not seem to be detrimental. The output gap is still large, unemployment properly measured is high, and the demand for safe assets remains elevated. Given these existing conditions, the Keynesian prescription would not be a reduction in federal expenditures. If someone told Krugman that hypothetical country x had all these conditions and that government expenditures were being cut, I doubt he would agree with them. Yet that is what is happening now. Now again, this does not mean the full potential size of the fiscal multiplier is necessarily low, but that it is being offset by Fed actions.
With that said, I am convinced by Valerie Ramey's survey article in the JEL that we really don't know the true size of the fiscal multiplier. And then there are questions of the political and economic efficiency of fiscal spending. So I am not a big fan of fiscal policy that increases government spending. I do, however, believe fiscal policy can pack a big punch with its creation of safe assets and its ability to do helicopter drops.