Wednesday, January 08, 2014

Bad event studies



Blogs are great, but they have their limitations. A lot of macro bloggers want to use specific real-world events to validate or invalidate their theories - "Market Monetarism", "Keynesianism", and so forth. This is not bad if done in a sort of Bayesian way - in other words, looking at events and slightly modifying or updating one's worldview. For example, the events since 2007 have gradually made people less and less worried about inflation. But when done in a small-sample-Frequentist sort of way - looking at a single event and viewing it as an up-or-down test of a grand theory - this kind of inference is incredibly inaccurate.

For example, take the recent row over the year 2013, in which we saw the Sequester and QE3. Did the events of 2013 disprove Market Monetarism? Paul Krugman at one point said the year would be a test of that (fuzzily defined) theory. Mike Konczal said much the same thing. Now Scott Sumner and David Beckworth are saying (surprise surprise) that 2013 demonstrates considerable empirical support for Market Monetarism. Sumner also lays into me for tweeting Konczal's article (though when I tweet things with question marks, it means I'm skeptical of the thing I'm tweeting; Sumner probably doesn't know that).

Brad DeLong points out something very important, which is that 2013 was a real experiment only if we believe there was a regime change in policy. In fact, there may have been zero, one, or two regime changes - the Sequester could have been a big departure, or a continuation of what people expected to happen, and the same goes for QE3. If 2013 was a regime change in monetary but not fiscal policy, then our conclusions should be different than if 2013 was a regime change in fiscal but not monetary policy, and yet different if 2013 was a regime change in both fiscal and monetary policy, and still different if 2013 was a regime change in neither fiscal nor monetary policy. And it is hard to know what represents a real regime change.

So that's one problem with doing these kind of informal "event studies" on blogs.

A second problem is that the theories themselves, as presented on the blogs, are fuzzy and not well-defined. What does "Market Monetarism" say? Does it say that fiscal policy doesn't affect the real economy, and that only monetary policy has an effect? Or does it say that monetary policy and fiscal policy both have an effect? Does "Keynesianism" say QE works at the Zero Lower Bound, or not?

But the biggest problem with this sort of inference is that there are just too many free parameters. There are Fed intentions, Congressional intentions, the effectiveness of QE, the impact of austerity, and the nature of exogenous shocks that hit the economy at the same time as the policies. So here are some interpretations of 2013 that seem consistent with a casual reading of the data:

1. Fiscal policy is very effective, but didn't really change because everyone had already expected the sequester since 2011. Monetary policy really changed, but isn't very effective. And the economy wasn't hit with any particularly big shocks.

2. Fiscal policy is utterly ineffective. Monetary policy is extremely effective, but the Fed decided to keep the U.S. at 2% inflation and a lower NGDP path than the pre-2007 trend. And who cares what exogenous shocks there were, since the Fed is so powerful.

3. Fiscal policy and monetary policy are both pretty effective. Congress decided to tighten and the Fed decided to ease in 2013, balancing each other out. And there were no big exogenous shocks.

4. Fiscal policy is much more effective than monetary policy. There was a real regime shift toward austerity in 2013. But it was canceled out by positive exogenous shocks, from the economy's natural tendency toward recovery, from the unexpected stability of Europe, from Japan's rapid growth, from shale gas, etc.

I could go on. There are more combinations.

Now you see why this is so hard, right?

As I see it, event studies are much better when done in a rigorous empirical context, where theories and hypotheses are carefully defined, dates and magnitudes are more precise, and more different observables can be brought into play. In other words, I think that this is one area where academia is clearly a lot better than blogs. (Mark Thoma agrees.)

Now that having been said, if you want a cleaner experiment in whether monetarism (in a generalized sense) is effective, look not at the U.S., but at Japan. Even there, the picture is complicated by an uncertain fiscal policy outlook, but it's a much more obvious example of a monetary policy regime shift without a simultaneous fiscal regime shift.


Updates:

Mike Konczal thinks 2013 shows that fiscal policy is needed alongside monetary policy.

84 comments:

  1. This hypothesis is the one that I think is most consistent:

    If the Fed believed completely in its own power and targeted NGDP directly, it could achieve it and fiscal policy would be rendered void. When the Fed does not believe entirely in its own power, fiscal policy has power. This almost always happens at the ZLB. The Fed does not believe completely in its own power, especially at the ZLB, and does not target NGDP directly.

    The Fed did as much as it believed it safely could, and the Fed indicated that it would have let NGDP rise at a higher level if fiscal policy had not been so austerian. The Fed essentially said that it would boost NGDP growth by X percent, and that it was content to let fiscal policy boost NGDP growth by Y percent, provided inflation didn't go crazy. NGDP growth would have been higher with appropriate fiscal or monetary policy.

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  2. The problem with considering fiscal policy is that nearly everybody focuses so much on just the federal part of it. So, we supposedly had this tightened fiscal policy at the fed level due to the sequester, and that is correct. However, at least partly offsetting that was that we finally had an end to outright contractionary fiscal policy that had been coming up from the state and local levels for a solid three years. This may have been more of a Three Stooges "stop hitting our head against the wall" sort of thing, but the fact is that there was a definite move from contractionary to at least neutral if not slightly expansionary coming from the state and local level. Not at all clear what the net out of all that was, but certainly not as contractionary as most have been talking about.

    Barkley Rosser

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    Replies
    1. Nice try but no http://2.bp.blogspot.com/-opH-QpBF0Hg/Uslq8-SgOmI/AAAAAAAAGrU/i5va8g7pTCo/s1600/fiscal+austeriy.png

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    2. Sorrry, Fullcarry, but your link does not work. Care to let us know what is in it, please?

      As it is, it is my understanding that the state and local sectors had major layoffs during 2010-2012, the one major part of the economy where this was going on during that period, but that this stopped in 2013 and even turned around slightly with some minor hiring. Now, it may be that your link argues that all this did not amount to much, which may be true, but it is in fact a part of fiscal policy and it moved from clearly contractionary to slightly expansionary, and certainly offset the contractionary stuff at the federal level to some extent.

      I also note that not a single person discussing this issue later in this thread, including Noah, is noting this fact, even though the decline in the state and local fisc during 10-12 was widely noted to be a major drag on the economy.

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    3. About 70% of the fiscal policy changes at the federal level in 2013 were in taxes, not spending (i.e. the sequestor). Thus it seems to me in order to compare the degree of fiscal consolidation with previous years it's essential that we use some measure that takes into account the revenue side of government fiscal policy.

      A measure that does this, plus takes into account fiscal policy changes at the state and local level, is the IMF's general government cylically adjusted primary balance (CAPB). The general government cyclically adjusted balance (CAB) takes into account any changes in the general government (i.e. including all levels of government) budget balance due to the business cycle. Thus changes in the cyclically adjusted balance are mostly due to discretionary fiscal policy, and consequently may be taken as a proxy for the degree of fiscal stimulus. The CAPB goes a step further, factoring out changes in net interest on general government debt and thus ensuring that practically all of the changes in general government fiscal balance are discretionary in nature. The best place to find CAPB data is the IMF Fiscal Monitor. You can find the CAPB on the bottom half of Table 2 on page 70:

      http://www.imf.org/external/pubs/ft/fm/2013/02/pdf/fm1302.pdf

      The US CAPB increased by 1.0%, 1.1% and 2.3% of potential GDP in calendar years 2011, 2012 and 2013 respectively. Thus, by this measure, US general government fiscal policy was over twice as contractionary in 2013 than in each of the the previous two years.

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    4. Mark,

      Just checked your source. Looked at the methodology they used on p. 63. It does not include at all state and local finances, which means my complaint about this whole discussion remains.

      Now, yiou make a good point that looking at government employment changes both do not cover effects of tax policy changes and that lots of government spending goes to the private sector. Howvever, on the latter point, the same holds for state and local governments as well. Government employment is likely to be a decent proxy for overall direct employment changes due to spending changes.

      I am prepared to grant that probably the tax changes tilt the overall effect more to the contractionary side, although there is plenty of evidence to the effect that the impact of tax changes are generally much weaker than many claim. Furthermore, I do not have data on what was going on with taxes at state and local levels, atlhough I suspect that there were not tax cuts sufficiently large to offset the tax increases at the federal level. But I would suggest that you and the IMF are still both overstating the degree of contractionary impact of total fiscal policy, even if the net effect may be more contractionary than I iniitially argued.

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    5. "Looked at the methodology they used on p. 63. It does not include at all state and local finances, which means my complaint about this whole discussion remains."

      At the conclusion of that US specific note on fiscal policy assumptions it clearly states:

      "Fiscal projections are adjusted to reflect the IMF staff’s forecasts for
      key macroeconomic and financial variables and different accounting treatment of financial sector support and are converted to a general government basis."

      In international government finance statistics the phrase "general government" essentially means all levels of government: central, state, regional or provincial; and local. You can find a detailed description of the meaning of "general government" in Chapter 2 of the IMF's Government Finance Statistics Manual:

      http://www.imf.org/external/pubs/ft/gfs/manual/

      If you still have any doubts that the IMF's estimates of US general government finances do not include state and local government, I refer you to "Statistical Table 3. Advanced Economies: General Government Revenue and Expenditure" on page 71 of the IMF Fiscal monitor:

      http://www.imf.org/external/pubs/ft/fm/2013/02/pdf/fm1302.pdf

      Note that US general government expenditures were 38.3% of GDP in calendar year 2013. According to the CBO, Federal outlays for FY 2013 were 20.8% of GDP:

      http://www.cbo.gov/publication/44716

      So obviously this measure includes alot more than just the federal government.

      "Government employment is likely to be a decent proxy for overall direct employment changes due to spending changes."

      This might be true at the state and local level but it's definitely not true at the federal. BEA measures of government spending show that about 60% of all government spending occurs at the federal level. However according to the BLS currently there are about 21.9 million employed in all levels of government in the US, of which only 2.7 million are employed by the federal government. Furthermore employees of the federal government make up only about 2% of all employed workers although federal spending is nearly 21% of GDP.

      As Paul Krugman has argued more than once, the federal government is essentially an insurance company with an army. Proxying the effect of federal spending changes by changes in federal employment, especially in comparison to changes in state and local government employment, simply doesn't make much sense.

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    6. Anonymous4:42 PM

      Barkley makes a good point which is being overlooked in this debate. We experienced unprecedented contraction in public employment (mostly at the state and local levels) over recent years, shedding around 750,000 jobs. However, only a 1,000 public jobs have been lost in 2013, not to mention that real government spending on consumption and investment was the same in the first quarter of 2013 as was in the third quarter of 2013.

      Looks like a classic example of "feeling good when you stop banging your head against the wall".

      The sequester, which as mostly an expiration of the payroll tax holiday, was simply not felt in real government expenditures. Real government consumption and and investment expenditures actually increased on the state and local level from the first quarter of 2013 to the third quarter. This is were the drag was primarily occurring. Therefore, as the drag was not holding back the economy as much.

      I don't believe that 2013 refutes Keynesianism. If anything, the data supports the Keynesian narrative. Perhaps economists over-predicted the effect that the sequester would have on (state and local) government, but it looks pretty clear that as the fiscal drag comes to an end, the economy picked up steam.

      This doesn't stop MM from attacking the government and fiscal policy, since quite frankly it is more of a political ideology masked behind an economic school of thought, where anti-government people can rail about how bad spending on infrastructure or rehiring the hundreds of thousands of public employees back.

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    7. "The sequester, which as mostly an expiration of the payroll tax holiday, was simply not felt in real government expenditures."

      The sequestor, which started on March 1, consisted of across the board cuts in discretionary spending and had absolutely nothing to do with the high income tax increase and the payroll tax increase which both commenced on January 1, 2013.

      "Real government consumption and and investment expenditures actually increased on the state and local level from the first quarter of 2013 to the third quarter."

      Yes, but Real Government Consumption Expenditures & Gross Investment (2009 dollars) averaged $2,992 billion in 2011, $2,963 billion 2012 and $2,906 in the first three quarters of 2013.

      http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=3&isuri=1&910=x&911=0&903=6&904=2011&905=2013&906=q

      So it fell by 1.0% in 2012 and for the first three quarters of 2013 it is on average 1.9% below its level in 2012. Unless there is a big pickup in the fourth quarter it appears that the rate of decline accelerated, not decelerated, by this measure.

      As for the idea that MM is anti-government and is primarily a political ideology, that's just absolutely ridiculous.

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    8. Mark,

      See my remark below, but bottom line is that looking at balance even cyclically adjusted does not account for impact of state and local govs as they generally run balanced budget. So this does not account for the stimulus coming from the rising spending and hiring at state and local levels.

      Barkley Rosser

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    9. "So this does not account for the stimulus coming from the rising spending and hiring at state and local levels."

      This is based on the highly debatable assumption that the stimulative effect of increased state and local spending significantly exceeds the contractionary effect of increased state and local revenue.

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    10. Anonymous8:40 PM

      I was wrong. I conflated the entire fiscal contraction with the sequester. The tax hikes began on Jan 1st, while the sequester began on March 1st.

      As for real government spending on consumption and investment, it decreased by 1.91% between 2011 and 2012, and decreased by 1.03% between 2012 and the three quarters of 2013. That is a deceleration, not an acceleration.

      Then also looking at public employment, it shows that the fiscal drag is coming to an end.

      Yes, MM is a free market anti-government political ideology, wrapped up into an "economic school of though".

      "Most of the blogging Market Monetarists have their roots in a strong free market tradition and nearly all of us would probably describe ourselves as libertarians or classical liberal economists who believe that economic allocation is best left to market forces. "
      http://marketmonetarist.com/2012/07/19/the-ngdp-level-targeting-the-true-free-market-alternative-we-try-again/

      This explains their aversion for fiscal policy and why many adherents not only believe that fiscal policy is ineffective, but downright harmful. It also explains the fact that is attracts the Austrian nutters.

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    11. "As for real government spending on consumption and investment, it decreased by 1.91% between 2011 and 2012, and decreased by 1.03% between 2012 and the three quarters of 2013. That is a deceleration, not an acceleration."

      Em, no.

      Real Government Consumption Expenditures & Gross Investment (2009 dollars) averaged $2,992.3 billion in 2011, $2,963.1 billion 2012 and $2,906.4 in the first three quarters of 2013.

      http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=3&isuri=1&910=x&911=0&903=6&904=2011&905=2013&906=q

      $2,963.1 billion is 0.97% less than $2,992.3 billion, and $2,906.4 is 1.95% less than $2,963.1 billion. The percent decrease is greater in magnitude in 2013 than in 2012 (so far).

      "Yes, MM is a free market anti-government political ideology, wrapped up into an "economic school of though"."

      Since when is libertarianism and classical liberal synonymous with "anti-government"? And in any case, that particular description is qualified with the word "blogging", and was written by what I believe is the most extreme libertarian (Lars Christensen) among Market Monetarist bloggers. I also think the phrase "economic allocation is best left to market forces" is subject to a great deal of interpretation. It's very difficult to generalize the political affiliations of MMers, as it is rather diverse.

      "This explains their aversion for fiscal policy and why many adherents not only believe that fiscal policy is ineffective, but downright harmful."

      One unifying belief among Market Monetarists is that the liquidity trap is a myth. Hence fiscal policy can never make up for bad monetary policy. It isn't opposition to fiscal policy so much as the conviction that fiscal policy is irrelevant for the purposes of aggregate demand management.

      "It also explains the fact that is attracts the Austrian nutters."

      In the form of antipathetic trolls, certainly (e.g. Geoff aka "Major Freedom" at the Money Illusion). MM is very much a demand-side economic school and Austrian Economic Theory (AET) is very much a supply-side economic school. AET is generally incompatible with MM and few Austrians find any points of agreement with MM.

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    12. Anonymous10:03 AM

      Even the BEA is calling shenanigans on you. Most of the growth attributed to the third quarter of 2013 came from:

      1. Inventory build up
      2. Deceleration in imports
      3. Accelerations in state and local government
      spending and in PCE (i.e. stopped hitting our heads against the wall).
      http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

      While there was considerable growth in the third quarter, 41% came from inventory build up, which is nothing to brag about at the moment. In addition, growth was also contributed to ameliorations in the fiscal drag.

      Libertarianism is an anti-government ideology that has roots stemming back to anarchy. Its modern day revival, which is a bastardization of left-wing anarchism, is attributed to right wing libertarianism, Ayn Randianism, and Austrians. In fact, much of the modern day revival of libertarianism can be traced back to Mises.org and Lew Rockwell.

      It is a naive belief system that as you abolish the government and rely on unfettered free markets, that this will lead to increases in individual and social welfare. This type of belief only appeals to cranks and crackpots. Sane people do not want to dismantle our safety nets or abolish social spending and (almost) every aspect of government.

      I do believe that MM are correct in claiming that monetary is not ineffective at the ZLB levels, but so don't many people, including Keynesian oriented persons. Using unconventional techniques, such as QE, taxing excess reserves, or abolishing paper money could be proven effective. Or even using conventional techniques such as expectations.

      In my experience of reading about MM and its followers is that there is an underlying aversion to fiscal policy and any form of social spending or government involvement to help stabilize business cycles.

      Perhaps they are right that all we need to do is target NGDPLT. However, I don't believe that this diminishes the idea that infrastructure spending, reversing the unprecedented public loss, extending unemployment benefits, and providing middle class tax relief would have no effect on AD during a severely depressed economy.

      While I realize that there is some economic disagreement between Austrians and MM, I was pointing out their similar political ideologies leanings. In fact, I don't view Austrian economics as actual economics, but as a political ideology masked as an "economic school of thought". I see a similar level with MM, using economics to push a libertarian agenda. That is why they make bold claims that fiscal policy has no impact on the economy, which is completely absurd.

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    13. "Even the BEA is calling shenanigans on you. Most of the growth attributed to the third quarter of 2013 came from:...spending and in PCE (i.e. stopped hitting our heads against the wall).

      While there was considerable growth in the third quarter, 41% came from inventory build up, which is nothing to brag about at the moment. In addition, growth was also contributed to ameliorations in the fiscal drag."

      Let's keep focused.

      How much real growth was really due to state and local government spending on gross investment and consumption in the last quarter, and how much did that change in the first three quarters compared to last year?

      Here's the contribution to RGDP growth according to the BEA:

      http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=3&isuri=1&903=2

      State and local government gross investment and consumption spending added 0.19 points to RGDP growth in 2013Q3 or 4.6%. In the first three quarters of 2013 state and local gross investment and consumption spending added an average of 0.033 points to RGDP growth. This is up from (-0.038) points last year. That's a difference of only 0.071 points and is trivial at best.

      "Libertarianism is an anti-government ideology that has roots stemming back to anarchy. Its modern day revival, which is a bastardization of left-wing anarchism, is attributed to right wing libertarianism, Ayn Randianism, and Austrians. In fact, much of the modern day revival of libertarianism can be traced back to Mises.org and Lew Rockwell."

      Frankly this BS on stilts.

      Since the term "liberalism" in the US gradually came to refer to "social liberalism", the term "libertarianism" began to be used in its place to refer to "classical liberalism". H. L. Mencken became one of the first prominent Americans to call himself a libertarian, and he did so primarily because he wanted to distinguish himself from social liberals. Most European "libertarians" still call themselves "liberals" because in Europe that term is still more identified with classical liberalism than it is with social liberalism.

      Classical liberalism emphasizes the need to secure the freedom of individuals by limiting the power of government. It advocates civil liberties with a limited government under the rule of law, private property, and a belief in economic environment in which transactions between private parties are free from government restrictions, tariffs, and subsidies. It builds on select ideas of Adam Smith, John Locke, Thomas Malthus, and David Ricardo.

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    14. "In my experience of reading about MM and its followers is that there is an underlying aversion to fiscal policy and any form of social spending or government involvement to help stabilize business cycles...However, I don't believe that this diminishes the idea that infrastructure spending, reversing the unprecedented public loss, extending unemployment benefits, and providing middle class tax relief would have no effect on AD during a severely depressed economy."

      The effect of any of these policies on AD is strictly conditional on the monetary policy reaction function. And if there is no such thing as the liquidity trap, then there is no reason to believe that these policies will have any effect at all on AD given that reaction function. Whether these policies are desirable or not should then be decided strictly based on other criteria.

      "While I realize that there is some economic disagreement between Austrians and MM, I was pointing out their similar political ideologies leanings."

      "Some" is an understatement. I would say finding what MM and AET agree on economically would require a microscope. And while I am probably not the right person to generalize the views of Austrians, I would argue that most, if not all, are libertarians. That kind of political uniformity is not really true with regard to MM. I myself am a Democrat and am probably well to the left of our President on most issues.

      "In fact, I don't view Austrian economics as actual economics, but as a political ideology masked as an "economic school of thought"."

      In all fairness to Austrians I think this is a gross mischaracterization. In its most sophisticated form Austrian Economic Theory has a highly evolved, if exceedingly idiosyncratic, methodology.

      "I see a similar level with MM, using economics to push a libertarian agenda."

      I would say that some MM bloggers choose to discuss libertarian ideas on their blogs. But that is certainly not true of David Beckworth, Nick Rowe, Marcus Nunes, David Glasner or Britmouse for example.

      "That is why they make bold claims that fiscal policy has no impact on the economy, which is completely absurd."

      It's incorrect to say that MM believes that fiscal policy has no effect on AD. MM believes that there is no such thing as a liquidity trap. Thus the effect of fiscal policy on AD is strictly conditional on the monetary policy reaction function. It's because of the monetary policy reaction function that fiscal policy has no effect on AD.

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    15. Anonymous6:41 PM

      While state and local government spending role in third quarter GDP growth was marginal, my point still holds; there was no severe fiscal contraction and we have "stopped banging our heads against the wall". The fiscal drag is becoming less of a drag an adding to economic activity.

      You seem quite unfamiliar with modern day American libertarianism. Smith, Locke, Ricardo, and especially Malthus (I got a good chuckle out of that) do not even come close to modern day American libertarianism (BTW, I see that you got your info straight out of wikipedia).

      Plus there is a problem equating classical liberalism with modern day American libertarianism. For instance, Thomas Paine could be classified as a classical liberal, but he was also the grandfather of social security, supported progressive taxation, and providing income to people upon emancipation. If he was alive today, he would be considered a card carrying commie in the eyes of American libertarians.

      The modern day American libertarian movement gained traction in 1964 with Goldwater running against the Civil Rights Act. This manifested into decades of Conservatives running on state's right to take rights away from people (minorities, gays, women) and then attacking social welfare spending with Reagan's fictitious "Cadillac welfare queen".

      People like Ayn Rand and Milton Friedman were also heavily influential on the movement. It is essentially an anti-state ideology that seeks to put a wall of separation between economics and the government.

      Today's American libertarian gained traction again with the Ron Paul movement, which comes straight out of Mises.org and Lew Rockwell. To this day many still claim that the 1964 CRA was a violent act against private property, while advocating a gold standard, dismantling safety nets, cutting back on social spending, and essentially getting the government out of the way so markets can work their "magic".

      I wish the Mises.org forums were not shut down, just to show you how batshit crazy these people are.

      Austrian economics is not a valid school of thought. There is no reason to abolish the state, go back to a gold standard, practice liquidationist measures, etc. Plus, they have been wrong on almost every single economic prediction - there has been no out of control inflation, the bond vigilantes never came, and austerity measurements during a time of severe AD deficiency do not promote growth.

      Quite frankly, I do not understand what you mean by "fiscal policy is contingent on monetary policy response functions".

      Regardless, this is why I don't take MM serious. It is their desire to proclaim that fiscal policy is largely irrelevant, despite the major role government has in the economy. The government sector on goods and services is almost 20% economy. When you throw in transfer payments it grows to one-third to forty percent of the economy.

      The government is a major player in economic affairs. MM want to deny this.

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    16. "While state and local government spending role in third quarter GDP growth was marginal, my point still holds; there was no severe fiscal contraction and we have "stopped banging our heads against the wall". The fiscal drag is becoming less of a drag an adding to economic activity."

      State and local gross investment and consumption spending had only a marginal affect on real growth last year also, so nothing really changed this year. The theory that state and local spending stopped falling is the whole reason why the tax increases and sequestor had no effect is seriously wanting.

      "Smith, Locke, Ricardo, and especially Malthus (I got a good chuckle out of that) do not even come close to modern day American libertarianism"

      Smith and Locke in particular are highly regarded by many American Libertarians:

      http://www.libertarianism.org/people/adam-smith

      http://www.libertarianism.org/people/john-locke

      Plus there is a problem equating classical liberalism with modern day American libertarianism. For instance, Thomas Paine could be classified as a classical liberal, but he was also the grandfather of social security, supported progressive taxation, and providing income to people upon emancipation. If he was alive today, he would be considered a card carrying commie in the eyes of American libertarians."

      Odd, because Thomas Paine is also lionized by American libertarians:

      http://www.libertarianism.org/people/thomas-paine

      And my impression is that much of his thoughts would be very compatible with left-libertarianism:

      http://bleedingheartlibertarians.com/2013/07/new-sep-entry-on-thomas-paine/

      "The modern day American libertarian movement gained traction in 1964 with Goldwater running against the Civil Rights Act. This manifested into decades of Conservatives running on state's right to take rights away from people (minorities, gays, women) and then attacking social welfare spending with Reagan's fictitious "Cadillac welfare queen"."

      Goldwater was opposed to the CRA on the basis of political principles, not because he was a racist. He was responsible for initiating the resurgence of the American conservative political movement in the 1960s and he also had a substantial impact on the libertarian movement, but you're conflating the two. In particular, the founding of the Libertarian party was induced by concerns about the Vietnam War, conscription, and the end of the gold standard. It had absolutely nothing to do with racism, homophobia or sexism.

      "People like Ayn Rand and Milton Friedman were also heavily influential on the movement."

      Yes, but Objectivists are openly hostile towards non-Objectivist libertarians and Ayn Rand condemned libertarianism as a greater threat to freedom and capitalism than liberalism and conservatism. And Milton Friedman considered himself to be a classical liberal, and yet you just claimed it was problematic to identify modern American libertarianism with classical liberalism. And frankly, what's so horrendous about having Milton Friedman as an influence?

      "It is essentially an anti-state ideology that seeks to put a wall of separation between economics and the government."

      There is a difference between putting limitations on government and being anti-state.

      "Today's American libertarian gained traction again with the Ron Paul movement, which comes straight out of Mises.org and Lew Rockwell."

      Ron Paul, and Lew Rockwell don't represent the views of all libertarians. Moreover most libertarians are not followers of Austrian Economic Theory.

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    17. "To this day many still claim that the 1964 CRA was a violent act against private property, while advocating a gold standard, dismantling safety nets, cutting back on social spending, and essentially getting the government out of the way so markets can work their "magic"."

      I would say those libertarians who oppose the CRA do so because they see it as an act against freedom. As for the gold standard that is a very popular position among adherents of Austrian Economic Theory, most of whom are also libertarians. As for the rest of those positions, yes, many libertarians believe that, but not all to the same degree. It so happens that Rand Paul embodies all of these beliefs, but again no single person can be said to represent the views of all libertarians. It is not at all as monolithic a political movement as you imagine.

      "I wish the Mises.org forums were not shut down, just to show you how batshit crazy these people are."

      Again, Austrianism is not libertarianism. Most Austrians are libertarians. But Austrians are not a majority of libertarians. You are conflating an economic school with a political movement.

      "Austrian economics is not a valid school of thought. There is no reason to abolish the state, go back to a gold standard, practice liquidationist measures, etc. Plus, they have been wrong on almost every single economic prediction - there has been no out of control inflation, the bond vigilantes never came, and austerity measurements during a time of severe AD deficiency do not promote growth."

      You will not find me disputing any of this. I spent a lot of time debating Austrians at Real Clear Economics and Forbes at one time. But these days I chose to ignore them by and large. But if you think all libertarians are Austrians then you are seriously confused.

      "Quite frankly, I do not understand what you mean by "fiscal policy is contingent on monetary policy response functions"."

      I mean that the effect of fiscal policy on aggregate demand is dependent on how monetary policy reacts to it. Basically both fiscal and monetary policy work by shifting the aggregate demand curve left or right. If monetary policy is targeting some outcome, say for example inflation, any attempt by fiscal policy to move the aggregate demand curve will be stymied as monetary policy will be changed in order to meet its target.

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    18. "Regardless, this is why I don't take MM serious. It is their desire to proclaim that fiscal policy is largely irrelevant, despite the major role government has in the economy. The government sector on goods and services is almost 20% economy. When you throw in transfer payments it grows to one-third to forty percent of the economy.

      The government is a major player in economic affairs. MM want to deny this."

      The Federal Reserve is also part of the government. This is why it makes absolutely no sense to say that MM is anti-government. MM is all about improving how policy is implemented by a government establishment.

      Furthermore, given the requirement by state and local governments to generally run balanced budgets, state and local governments are endogenous to the state of the economy. Thus to a great extent monetary policy determines the level of fiscal expansion or contraction at the state and local level. This is also evident in the Euro Area where there is almost no fiscal policy on a centralized level. In a very real sense the fiscal austerity seen in the peripheral countries of the Euro Area is directly attributable to the ECB's tight monetary policy.

      Now, in the US's case we do have a large centralized fiscal establishment but the problem is that the House of Representatives controls fiscal policy and it has been controlled by Republicans for the last four years. Thus even if the Federal Reserve did not offset a more expansionary fiscal policy, none is forthcoming.

      Thus the only game in town is monetary policy. And interestingly monetary policy is the only thing that Democrats actually have control of by virtue of the fact the President nominates candidates to the Board of Governors of the Federal Reserve and the Senate must confirm those nominees, and the Democrats control both the Presidency and the Senate.

      Thus the real mystery is why don't Democrats care more about the conduct of monetary policy than they do?

      Delete
  3. Nothing is better than the blogs, Smith! Repent!

    ReplyDelete
  4. This is cute, but obviously no single observation is probative. Very true. However, to use Krugman's words, which he has incredible hard time applying the adage to himself - every piece of evidence has some cumulative impact.

    However, If you predict a disaster due to the "biggest fiscal contraction since Korean war " (to quote Krugman correct), and then nothing much happens, looking for explanations in "shocks" like natural growth is a bit disingenuous. At the very least, the "biggest fiscal policy contraction since Korean war" can be easily offset by some small stuff. In other words, fiscal policy is largely immaterial.

    ReplyDelete
    Replies
    1. It's not the shortness of the sample period that's the problem; event studies use discrete events, which happen in a very short time.

      The problem is the large number of free parameters, coupled with the fuzziness of the ideas being tested.

      Delete
    2. Free parameters are fine, but some conclusions are inescapable:

      Even "the greatest fiscal contraction since Korean war" can be offset by some noise.Assume no impact of MP, then there are no obvious candidates for the offset, suggesting that fiscal policy's impact is small.

      Unless, you assume that we would have had some large acceleration of growth from say 2.2% (2012) to 5% this year. Basically, believing in large fiscal multipliers forces you to believe in a sudden, 5-years into recovery acceleration in growth. Very, very doubtful.

      Delete
    3. Or it could be that people already expected the fiscal contraction as far back as 2011, and much of the impact had already been felt.

      Delete
    4. Fiscal policy through expectations channel? How so? Expected cuts in spending slow current activity? Everybody was pretty sure the sequester would go through, early on? So, the contraction/negative impact happened when? 2012? 2011? 2010?

      None of those suppositions are very credible.

      Delete
    5. 2011 and 2012.

      Hey, what you find credible.is between you and your Bayesian prior... ;-)

      Delete
    6. Well, to quote one of your heroes:
      "...Meanwhile, fiscal policy has a direct, current effect on the economy, which easily trumps attempts to move the economy by changing the Fed’s messaging.."

      so, you might want it take it up with Krugman and explain to him that's not how fiscal policy works. I am pretty sure he'll adjust his priors accordingly :).

      Delete
  5. We would better off if we never discovered formal economics. We will never understand something as complex as the economy. I

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  7. OK, if the fiscal multiplier is close to zero, that would mean that Japan can raise taxes and cut spending all it wants AND that NGDP can expand if the BOJ acts accordingly.

    So, you do have a good experiment. If it works the the Eurocrisis is solved easily - Germans won't bailout anyone, but will tolerate slightly bigger inflation.

    Now, all we need is big enough monetary expansion from Japan, which arguably isn't present yet (why just 2%? Will businesses and consumers really notice such low inflation, unless they keep it for several years?).

    ReplyDelete
    Replies
    1. No, it can't, since taxes have also (negative) supply-side effects.

      Delete
  8. Bill Ellis7:25 PM

    Taking the headline way too literally...What's up with Fukushima ?

    One thing is for sure...the Japanese are not being forthcoming about what is going on...and none of the governments of other nations are complaining about it including us. And they should be. We should all be offering to rush help there... But we aren't It does not make sense at all.
    So it compels one to assume that no one knows what to do.

    Right now on social media there is a lot of supposition being passed off as fact. It may be right. Or in the ballpark. Or way off.
    But there are at least some scary coincidences.

    The establishment media should be looking at this if only to dispel what is fast becoming wide spread information. And they are not.

    The contrast between how the media treated the BP spill and Fukushima, is deeply disturbing. BP---24/7 hysteria. Fukushima, an occasional dark supposition.

    ReplyDelete
  9. Which hypothesis do you think is most plausible, Noah?

    ReplyDelete
    Replies
    1. ...I have no idea, really.

      Delete
  10. Also, I think that you're unclear what you mean when you say "effective"

    Market monetarists certainly believe that fiscal policy does *something* to the economy, otherwise the concept of monetary offset wouldn't make any sense (what would you be offsetting?). The point is that they believe that monetary policy still steers the economy even when interest rates are at zero. Accordingly, I would think that market monetarists see your hypotheses 2 and 3 as essentially identical.

    I agree with you that 2013 provided no empirical proof one way or the other. However, what I think 2013 did do was seriously undermine the logic of the Keynsian position that fiscal stimulus is important when interest rates hit zero (unless you buy the "positive shocks" theory that Krugman has lately espoused, which strikes me as about as plausible as the confidence fairy). The fact of the matter is that Krugman went on the record warning that the sequester could cost us 700,000 jobs.

    http://www.nytimes.com/2013/02/22/opinion/krugman-sequester-of-fools.html

    Job growth in 2013 basically came in at 2012 levels. That's what you call a failed prediction.

    ReplyDelete
    Replies
    1. "The fact of the matter is that Krugman went on the record warning that the sequester could cost us 700,000 jobs."

      Interestingly, Krugman links to Macoreconomic Advisers (MA):

      http://macroadvisers.blogspot.com/2013/02/mas-alternative-scenario-march-1_19.html#!/2013/02/mas-alternative-scenario-march-1_19.html

      In support of his claim. The MA forecast was made in February 2013 and only estimates the effect of the sequestor, not the tax increases, which by most accounts were to have significantly greater economic impact than the sequestor.

      What I find interesting is their real GDP (RGDP) forecast. Their baseline forecast was that RGDP was to grow by 2.1%, 2.4% and 2.9% in 2013Q1, 2012Q2 and 2013Q3 respectively. Their forecast with the sequestor was that RGDP would grow 1.6%, 1.1% and 2.3% in 2013Q1, 2013Q2 and 2013Q3 respectively. Actual RGDP growth was 1.1%, 2.5% and 4.1% in 2013Q1, 2013Q2 and 2013Q3 respectively.

      Growth turned out to be worse in 2013Q1 than in either forecast but better in 2013Q2 and 2013Q3 than in either forecast. RGDP growth was forecast to average 2.5% in those three quarters according to their baseline forecast and 1.7% with the sequestor. Instead growth has averaged 2.6%.

      This is very consistent with Scott Sumner's forecast that growth would be about the same regardless of fiscal policy changes.

      Delete
    2. Mark,

      That's an extremely good point.

      Delete
    3. Wonks Anonymous2:01 PM

      One could hypothetically be an MM who also thinks Ricardian equivalence prevents fiscal policy from affecting aggregate demand (Cochrane & Lucas sometimes seemed to argue such a view, saying if spending was paid for by printing money "then that's just monetary policy"). Such a person would refer to "monetary offset" only when granting fiscal policy an effect for the sake of argument against Keynesians.

      Delete
  11. Noah,

    I think Scott Sumner's point was that Krugman himself said it was a big test. So he can't have it both ways: either he was using unmeaningful events as tests of big theories - which could be reckless of him - or the test was valid and the theory passed it.
    In any case, if things had gone the other way, do you not think that you would have counted another victory for Krugton?

    ReplyDelete
    Replies
    1. I think Krugman and Konczal were wrong that it would be a big test. I think at best it shifts our beliefs a little bit.

      Delete
    2. @YoungEcon1:31 AM

      I thought that was Sumner's point as well.

      http://www.themoneyillusion.com/?p=25769

      Delete
    3. Yes...but actually there are so many free variables here that I'm not sure in which direction it shifts my beliefs! ;-)

      Delete
    4. The point is that Sumner, and others, are criticizing the fact that Krugman is happy to do these bad event studies when it goes in the right direction but then dismisses them when they do not. He called the test, as did Konczal, and then does not acknowledge that the test went the other direction. Of course the test could have gone the way for many reasons, these are bad event studies, but Krugman and others are constantly using them themselves. This is unjustified, just as this article notes, the sample sizes are too small and bloggers need to stop treating a series of predictions over a short times series as strong evidence for or against particular positions. It is weak evidence at best. I find this most recent post at odds with the Krugtron the invincible post in which you claim that Krugman is right because of some similar event studies.

      Delete
  12. Noah,
    Your characterizations of Sumner claiming victory obfuscate the issue. Sumner stated that 2013 was a poor test of Market Monetarism many times, and that Krugman's assertion was silly. Sumner then stated at the end of the year that 2013 basically confirmed his priors (aka passed Krugman's bogus test).

    What the whole argument has been about is Krugman (and now you and Delong) stating that 2013 gave him no reason to reconsider his priors. Well, 2013 was supposed to prove market monetarism wrong, or wasn't it? Did it? If it didn't, then why don't you say that you need to reconsider, if only the tiniest bit, because maybe, just maybe, it's a plausible theory. Sure, future events will cause everyone to reconsider their priors. But 2013 was supposed to be THE YEAR, according to Krugman, that market monetarist arguments fell apart. If you suggest that, and then they don't fall apart, it suggests your mental model may not be perfect.

    It's disappointing to see how most of the blogs I love have dodged the issue by claiming (reasonably) that 2013 doesn't prove anything. We know that. Sumner knows that. Krugman said otherwise, and now he doesn't want to have that prediction count.

    ReplyDelete
  13. In New Keynesian DSGE models, analyses of fiscal stimulus typically hold monetary policy constant by defining monetary policy as the expected forward path of the real policy rate. See, for example:

    http://www.columbia.edu/~mw2230/G_ASSA.pdf

    "If prices or wages are sticky, monetary policy affects real activity, and so the consequences of an increase in government purchases depend on the monetary policy response. One might suppose that the question of interest should be the effects of government purchases 'leaving monetary policy unchanged'; but one must take care to specify just what is assumed to be unchanged. It is not the same thing to assume that the path of the money supply is unchanged as to assume that the path of interest rates is unchanged, or that the central bank's inflation target is unchanged, or that the central bank continues to adhere to a 'Taylor rule,' to list only a few of the possibilities.

    I shall first consider, as a useful benchmark, a policy experiment in which it is
    assumed that the central bank maintains an unchanged path for the real interest rate,
    regardless of the path of government purchases. This case corresponds, essentially to
    the standard 'multiplier' calculation in undergraduate textbooks, where the question
    asked is how much the 'IS curve' shifts to the right--that is, how much output
    would be increased if the real interest rate were not to change. Here I wish to consider
    a similar question; but in a dynamic model, it is necessary to define the hypothetical
    policy in terms of the entire forward path of the real interest rate."

    Does anyone actually believe this is how the monetary authority interacts with the fiscal authority, whether at the zero lower bound or away from it? When the stimulus package passed, the Fed became more optimistic about the future path of the output gap and inflation relative to the alternative scenario. As a result, they planned to raise the policy rate sooner than otherwise expected, and the markets most likely anticipated this. Policy fail, surely?

    In general, I agree with your point about the difficulty of doing good science with observational studies in which n = 1. The debate between the Keynesians and the market monetarists, however, is really a theoretical debate, since to the extent that either utilizes contemporary macro, they both feed out of the New Keynesian trough. The MMs expressed skepticism about the scenario that is supposed to hold in all of the analyses supporting the efficacy of fiscal policy, and the Keynesians (implicitly) endorsed it. The scenario did played out in favor of the MMs. That's the real story here, gotchas and sloppy science notwithstanding.

    ReplyDelete
  14. Kevin it's amazing how self-righteous you MMers are getting here. Meanwhile you have people like Bill Woosley making claims that are flat out false about what Krugman even said back in April. Krugman never claimed there would be a recession.

    You think people refusing to admit that Sumner was right about everything are somehow shown in a bad light? What light is it for you folks to be this obsessed with spiking the ball?

    For the record 2013 did not prove MM is right much less did it 'kill Keynesianism.' As Delong pointed out, typically you expect the economy to come back in a neutral year of policy about 2/5 of the ouput gap. As we didn't see this in 2013 there was no MM victory. It's that simple. Period. Full stop.

    http://diaryofarepublicanhater.blogspot.com/2014/01/sumners-trouble-is-he-doesnt-know-what.html

    Noah-good job here. I like the way you come back here as Sumner has been calling you 'Bayesian'-and not in a good way evidently.

    The fact is it's just silly to hold up one event like this as proving something categorically. Now at this point the MMers answer is the 'Yeah, but Krugman said...'

    A little childish all this gloating especially when there is nothing to gloat about.

    ReplyDelete
    Replies
    1. DeLong expected 2/5 of the output gap reversion? So wait, DeLong expected 7.5%*2/5= 3% catch-up growth on top of say 2.5% of long-run growth for the grand total of 5.5%?

      In other words, you also expected 5.5% growth in 2013?

      Delete
    2. I don't think anyone expected 5.5% growth-2.5% is an X part of the recovery but it's smaller than 2/5 so the number should have been higher than 2.5% but not 5.5% as you're leaving out the 2.5%- but better than what we got. In fact most recessions have seen something like 5.5% growth at some point. In 2003 we rallied back with 8.2% growth a quarter.

      Yes, 2.5% is very medicore in terms of a recovery. Yet you and your MM friends want to declare this a victory. Yeah-sure couldn't use any fiscal stimulus or even any lightening up of austerity, not with 1% inflation.

      Apparently you're unaware that since WWII-until 2008 this was just the normal functioning of the economy. See Delong's charts.

      http://delong.typepad.com/sdj/2014/01/the-relative-efficacy-of-fiscal-and-monetary-policy-at-the-zero-lower-bound-where-are-the-goalposts-anyway-the-honest-bro.html#more

      Delete
    3. Ok, so 4 years of only 1/12 of catch-up growth gives us 2/3 of the gap left, so not 5.5%, but 4.5%. Is that correct? Is that the growth we should've expected in 2013 without fiscal austerity/sequester?

      Delete
    4. Mike,

      One thing I find frustrating is the continuing fiscalist obsession with boosting budget deficits without even *acknowledging* the real possibility that if the Fed is basically getting the nominal growth that it wants, it could possibly respond to fiscal stimulus with contractionary monetary policy. Krugman, and others say that "conventional monetary policy is ineffective" or otherwise imply that this offset will not occur without actually putting much effort into thinking about whether that is true.

      I think Noah is more skeptical of the MM position than is warranted by the facts (or, at least, not skeptical enough of the fiscalist position). The fiscalist story is that we're in a liquidity trap. The Fed is really doing all it can, and it's Congress's responsibility to pick up the slack. 2013 witnessed really unprecedented fiscal austerity (as measured by the cyclically adjusted budget balange), worse than what the eurozone has gone through. The Keynsians were very worried about this, to the point of quoting CBO figures warning that three-quarters of a million jobs would be lost if Congress didn't back off.

      And...

      The economy has essentially stayed on exactly the same trendline that it was on in 2012 in terms of nominal growth, jobs, and inflation.

      The fact that Krugman jumps to some "exogenous shocks" handwaving in response to this is just nonsense, because if the MM were 100% right about everything, then of COURSE we would be seeing favorable economic indicators (e.g. strong housing data), because the growth would have to come from somewhere to offset the fiscal contraction. Krugman is taking the MM prediction and trying to spin it as somehow reinforcing *his* position. I don't find it very convincing.

      Delete
    5. Mike Sax,

      In my post I stated 2013 was a lousy test of anything. I don't think MM was proved correct or incorrect and I wouldn't join them in 'spiking the ball', as you say.

      As your post shows though, you have a misunderstanding of what 2013 "could" prove:

      "For the record 2013 did not prove MM is right much less did it 'kill Keynesianism.' As Delong pointed out, typically you expect the economy to come back in a neutral year of policy about 2/5 of the ouput gap. As we didn't see this in 2013 there was no MM victory. It's that simple. Period. Full stop."

      For example, 5.5% growth in 2013 wouldn't have proved market monetarism. Nor would 1.5% growth disproved it.

      The only thing that could have proved or disproved market monetarism would be the fed explicitly adopting NGDPLT and hitting the target dead on. I'm very skeptical about that proposition, and would be surprised if that policy rule was as effective as Sumner seems to think it is.

      But it may be better than the current interest rate / Evan's rule regime. That's all I'm arguing. That it's worth consideration. That recent evidence makes it more worthy of consideration, not less.

      Why anyone, liberal or conservative, would take issue with that is what I don't understand.

      PS. I undertsand you don't like Sumner's disposition to attack libralism, nor agree with most of his other views. I'm the same. I just don't see his pet policy (NGDPLT) getting fair consideration in the blogosphere.

      Delete
    6. Brad DeLong:
      "Since 1950 and before 2007, the way to bet was that, whatever the current gap between U.S. real GDP and potential output was, the U.S. economy would close 2/5 of that gap over the course of the next year with roughly neutral policy."

      Actually, across the time period in question the speed varies considerably. Up through the 1969 recession the output gap typically closed completely within about a year. The same thing was true of the 2001 recession. Only in the the 1974, 1980, 1982 and 1991 recessions did the output gap ever close by roughly these proportions (and even then not consistently year after year).

      More importantly, when has there ever been "neutral policy"? Look at the Fed Funds rate from 1954-present and 3-month T-Bill rates from 1950 through 1954:

      http://research.stlouisfed.org/fred2/graph/?graph_id=154348&category_id=0

      (Changes in the nominal short term interest rate are a highly imperfect measure of monetary policy stance, but nevertheless they will serve to make my point in this case.)

      Federal Reserve policy always resulted in a significant drop in the Fed Funds rate or short terms rates before and during a recovery.

      Anyone who believes in "spontaneous recovery" is seriously deluding themselves.

      Delete
    7. Kevin, I think NGDPLT has made quite an impression on the blogosphere. I don't have any objection to it being tried. My problem is Sumner's tying it to fiscal austerity. If he stops that-which he wont-then I have no problem-though we certainly can be no more than agnostic of what it's success would be at this point.

      Delete
    8. Sam who's obseessed with increasing budget deficits? We've had nothing but fiscal contraction for 4 years-starting in 2010.

      Delete
  15. Good post. I think we may also have an event study without an event. The fiscal policy which should affect the economy is total government fiscal policy not just Federal Government fiscal policy. The federal shift to austerity came at the same time as a state and local shift from austerity to neutrality. Total G has declined pretty much smoothly since the recovery started (with an uptick in 2012Q3). I don't see anything much new in the relationship between G and GDP in 2013.

    https://research.stlouisfed.org/fred2/graph/?graph_id=154301&category_id=0

    ReplyDelete
    Replies
    1. http://2.bp.blogspot.com/-opH-QpBF0Hg/Uslq8-SgOmI/AAAAAAAAGrU/i5va8g7pTCo/s1600/fiscal+austeriy.png

      Delete
    2. About 70% of the fiscal policy changes at the federal level in 2013 were in taxes, not spending (i.e. the sequestor). Thus it seems to me in order to compare the degree of fiscal consolidation with previous years it's essential that we use some measure that takes into account the revenue side of government fiscal policy.

      A measure that does this, plus takes into account fiscal policy changes at the state and local level, is the IMF's general government cylically adjusted primary balance (CAPB). The general government cyclically adjusted balance (CAB) takes into account any changes in the general government (i.e. including all levels of government) budget balance due to the business cycle. Thus changes in the cyclically adjusted balance are mostly due to discretionary fiscal policy, and consequently may be taken as a proxy for the degree of fiscal stimulus. The CAPB goes a step further, factoring out changes in net interest on general government debt and thus ensuring that practically all of the changes in general government fiscal balance are discretionary in nature. The best place to find CAPB data is the IMF Fiscal Monitor. You can find the CAPB on the bottom half of Table 2 on page 70:

      http://www.imf.org/external/pubs/ft/fm/2013/02/pdf/fm1302.pdf

      The US CAPB increased by 1.0%, 1.1% and 2.3% of potential GDP in calendar years 2011, 2012 and 2013 respectively. Thus, by this measure, US general government fiscal policy was over twice as contractionary in 2013 than in each of the the previous two years.

      Delete
    3. "About 70% of the fiscal policy changes at the federal level in 2013 were in taxes, not spending (i.e. the sequestor). Thus it seems to me in order to compare the degree of fiscal consolidation with previous years it's essential that we use some measure that takes into account the revenue side of government fiscal policy."

      Intuitively-yes I know it doesn't belong in economics!-I'd expect this kind of consolidation to be less contractionary-tax cuts on the rich wouldn't hurt growth too much.

      Delete
    4. "Intuitively-yes I know it doesn't belong in economics!-I'd expect this kind of consolidation to be less contractionary-tax cuts on the rich wouldn't hurt growth too much."

      Approximately two thirds of the revenue raised by the 2013 tax changes comes from the payroll tax increase which falls most heavily on those with low incomes and according to the CBO has a higher fiscal multiplier than any other kind of tax change.

      Delete
  16. I have now looked at the numbers and posted about this on Econospeak. Job gains in the state and local sectors during 2013 basically directly offset job losses in the federal sector, a dramatic change from the previous three years, when over 700,000 jobs were lost in the state and local sectors while there was a slight gain in the federal sector.

    Therefore, there was simply no net change in fiscal policy overall in the US economy in 2013. None of this can be tested during this past year, which simply reinforces Noah's doubts, which are based on more theoretical considerations.

    ReplyDelete
    Replies
    1. "Therefore, there was simply no net change in fiscal policy overall in the US economy in 2013."

      Since when are the effects of fiscal policy measured purely in terms of their effects on government employment?

      In February the CBO estimated the “equivalent” of about 750,000 fewer full-time jobs would exist by the fourth quarter due to the sequester. The CBO’s estimates did not include a breakdown into federal versus non-federal jobs but I think it’s fairly obvious that the CBO did not believe a large proportion of the jobs lost would be in the federal government. Rather, they would be due to the indirect effect of the decline in federal government outlays.

      According to the CBO’s “Budget and Economic Outlook: Fiscal years 2013 to 2023″, Table 1-2, the Defense Department, nondefense discretionary and Medicare will be cut by 7.9%, 5.8%, and 2.0% respectively. The Defense Department employed about 770,000 civilians in FY2010, the Department of Health and Human Services employed about 70,000, and all other departments, except the Social Security Administration (which is completely exempt), employed about 2.00 million people. Even assuming the federal jobs lost is proportional to the size of the spending cuts in a given department, that yields about 61,000 civilian Defense Department jobs, about 1,400 Health and Human Services jobs lost, and about 116,000 other federal jobs lost, or the equivalent of about 176,000 federal government jobs lost.

      Thus, assuming this estimate is correct, less than a quarter of the estimated “equivalent” jobs lost will be in the federal government. Furthermore, federal agencies will probably avoid furloughs longer than 22 days because they fall under “reductions in force” rules. Without extended furloughs or layoffs, few federal government jobs will actually be lost as your cited (on your blog) estimate of 92,000 federal jobs lost due to the sequestor demonstrates.

      Furthermore, about 70% of the fiscal changes at the federal level in 2013 were in taxes, not spending. In November 2012 the CBO estimated that the maximum level employment effect would be a decrease of about 200,000 jobs and 640,000 jobs (80% 0f combined payroll and UI effect of 800,000 jobs lost) for the high income tax increase and payroll tax increase respectively:

      http://www.cbo.gov/sites/default/files/cbofiles/attachments/11-08-12-FiscalTightening.pdf

      That's a total of about 840,000 jobs lost due to tax increases alone, and I seriously doubt that the CBO thought many, if any, of those would be government jobs.

      Delete
    2. Mark,

      This is essentially a repeat of what I just posted above. IMF did not include anything about what goes on at the state and local levels in their estimates of fiscal policy impacts for the reason that they get their data from the CBO, and the CBO does not either. My main complaint still holds: none of this accounts for the offsetting impacts coming from fiscal policy effects at the state and local levels. These are substantial, but they are simply not being taken into account at all.

      Now above I granted that looking at public employment changes does not cover the impact of tax changes, and tax increases occurred at the federal level. I gathered data on employment at the state and local levels on employment, but not on taxes. I do not really know, but my sense is that there was not much tax cutting going on at state and local levels last year, so probably on the tax side there is no offset to what was going on at the federal level. But the fact remains that ignoring the state and local levels overstates the contractionary impact of fiscal policy changes last year, even if in fact in the end they were still contractionary on net.

      Barkley Rosser

      Delete
    3. "IMF did not include anything about what goes on at the state and local levels in their estimates of fiscal policy impacts for the reason that they get their data from the CBO, and the CBO does not either."

      The IMF clearly states that their fiscal measures are for "general government".

      In international government finance statistics the phrase "general government" essentially means all levels of government: central, state, regional or provincial; and local. You can find a detailed description of the meaning of "general government" in Chapter 2 of the IMF's Government Finance Statistics Manual:

      http://www.imf.org/external/pubs/ft/gfs/manual/

      If you still have any doubts that the IMF's estimates of US general government finances do not include state and local government, I refer you to "Statistical Table 3. Advanced Economies: General Government Revenue and Expenditure" on page 71 of the IMF Fiscal monitor:

      http://www.imf.org/external/pubs/ft/fm/2013/02/pdf/fm1302.pdf

      Note that US general government expenditures were 38.3% of GDP in calendar year 2013. According to the CBO, Federal outlays for FY 2013 were 20.8% of GDP:

      http://www.cbo.gov/publication/44716

      So obviously this measure includes a lot more than just the federal government.

      P.S. As long as I'm replying to your reply I should also make some minor corrections.

      "The Defense Department employed about 770,000 civilians in FY2010, the Department of Health and Human Services employed about 70,000, and all other departments, except the Social Security Administration (which is completely exempt), employed about 2.00 million people. Even assuming the federal jobs lost is proportional to the size of the spending cuts in a given department, that yields about 61,000 civilian Defense Department jobs, about 1,400 Health and Human Services jobs lost, and about 116,000 other federal jobs lost, or the equivalent of about 176,000 federal government jobs lost."

      should read

      "The Defense Department employed about 770,000 civilians in FY2010, the Department of Health and Human Services employed about 70,000, and all other departments, except the Social Security Administration (which is completely exempt), employed about 1.93 million people. Even assuming the federal jobs lost is proportional to the size of the spending cuts in a given department, that yields about 61,000 civilian Defense Department jobs, about 1,400 Health and Human Services jobs lost, and about 112,000 other federal jobs lost, or the equivalent of about 174,000 federal government jobs lost."

      Delete
    4. Mark,

      So, you may be right about the general government balances, alhtough I never saw any account of how they deal with state and local governments. However, there is still a problem. You are measuring fiscal policy by a budget balance measure, granted cyclically balanced. But state and local fisc does not affect this (or not much) in that most state and local governments run balanced budgets (some exceptions). So, their contribution to this will not show up as some increased or decreased aggregate change in balance.

      OTOH, there clearly was stimulus from them nevertheless in that their spending and hiring rose. As this did not affect any balance, it remains unaccounted for.

      Barkley Rosser

      Delete
    5. "So, you may be right about the general government balances, alhtough I never saw any account of how they deal with state and local governments."

      Yes, but that's true of all of the 90 or so nations covered by the IMF Fiscal Monitor. In my opinion going into detail on the fiscal assumptions concerning all of the state and local governments would be rather burdensome for the publication.

      "OTOH, there clearly was stimulus from them nevertheless in that their spending and hiring rose. As this did not affect any balance, it remains unaccounted for."

      This is based on the highly debatable assumption that the stimulative effect of increased state and local spending significantly exceeds the contractionary effect of increased state and local revenue.

      Delete
    6. Not debatable at all, Mark, if one accepts the old balanced budget multiplier idea. Spending changes have bigger bangs for the buck in the short run on aggregate demand than identical tax changes.

      Delete
    7. "Spending changes have bigger bangs for the buck in the short run on aggregate demand than identical tax changes."

      Yes, but how much bigger? Let's model this.

      First of all we need some multipliers. I want to keep this simple so I just want a spending and a tax change multiplier. Romer and Bernstein's "Job Impact of the American Recovery and Reinvestment Act" used a multiplier of about 1.6 for spending and 1.0 for tax changes (see Appendix):

      http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf

      Let's assume all changes to the CAPB were spending changes except for 2013 which we'll assume was two thirds tax changes and one third spending changes. Thus the multiplier for the 2013 CAPB change will be 1.2.

      And let's assume that all changes to state and local fiscal policy were balanced budget changes. Then any reduction in state and local spending would have a multiplier of 1.6-1.0=0.6.

      Taking the CAPB changes from 2010 through 2013 which were (-0.2), 1.0, 1.1 and 2.3 respectively and multiplying by their respective multipliers yields an economic effect of (-0.32), 1.60, 1.76 and 2.76 respectively (where negative is expansionary and positive is contractionary).

      Now we need an estimate for the size of the reduction in state and local spending relative to potential GDP. Here is a graph of state and local spending and revenue as a percent of potential GDP:

      http://research.stlouisfed.org/fred2/graph/?graph_id=154516&category_id=0

      State and local spending fell from 15.7% of potential GDP in 2009 to 15.4% in 2010 to 14.7% in 2011 to 14.4% in 2012 and to an average of 14.1% in 2013. Thus the reductions in state and local spending as a percent of potential GDP are 0.3, 0.7, 0.3 and 0.3 in 2010 through 2013 respectively.

      Multiplying by the balanced fiscal multiplier of 0.6 yields an economic effect of 0.18, 0.42, 0.18 and 0.18 for 2010 through 2013 respectively. Adding these to the economic effects of the CAPB changes yields an economic effect of (-0.14), 2.02, 1.94 and 2.94 for 2010, 2011, 2012 and 2013 respectively.

      In short, even using a balanced budget multiplier, and using what I think are very generous assumptions, the fiscal changes in 2013 were significantly more contractionary than in the previous two years. Furthermore, even in its most contractionary year, state and local spending reductions only contributed about one fifth of the negative economic impact.

      Delete
    8. So Mark, to follow up on the response I made over on Econospeak earlier, I largely accept your numbers except for your signs, although there are still second order effects that could be debated.

      Given that, it is clear that the really big shift was between 2009 and 2010 when we had a shift of more than 2%, much discussed and debated about since. You are probably right that I was wrong in my initial claim that the local and state effects offset the federal effect, although they partially offset it, but the more recent shift was probably more on the order of 1% (or a bit less, although I shall not press that point... ). Yes, in the end the fiscal policy was contractionary, but still not by as much as most in this debate/discussion have assumed.

      BTW, thank you for providing these careful calculations of the numbers, which I shall not further dispute in a serious way.

      Barkley Rosser

      Delete
  17. Noah,

    What I find frustrating about the commentary from DeLong, Krugman, yourself, and other Keynesian-inclined, MM-skeptical bloggers is this: suppose for the sake of argument that those guys are completely correct and Scott Sumner is totally wrong; the liquidity trap is very real, very binding, and very difficult to break out of. But we can all agree that so-called helicopter drops, such as a payroll tax cut financed by money-printing would "work" in the sense of boosting NGDP and inflation. So then why do they use all of their influence capital pushing for more fiscal stimulus instead of pushing for Fed reforms that would allow it to finance the deficit with money-printing if we hit the zero bound again? To me that seems like the logical next step after rejecting MM.

    ReplyDelete
    Replies
    1. Pundits have no political capital, only opinions.

      Republicans are against further increases in the deficit whether it is financed by the Fed or some other mechanism. It is a "moral issue" with them and their base and they are not receptive to compromise on a "moral issue". It is a non-starter. We have governing elites who are rejecting reasonable arguments out of hand over "moral principles".

      Delete
    2. Anonymous12:50 PM

      Actually, Republicans are against further increases in the debt if they are driven by cuts on regressive taxes like the payroll tax. It's far less clear that they are against increasing the debt via tax cuts that fall on business or upper-income earners. And Republicans are absolutely against "money-printing" for any reason (calling this last one a "moral issue" would be giving them far too much credit; the truth is, "money-printing" just sounds like something bad to them).

      But I think your larger point stands. Why should pundits waste whatever "political capital" they have advocating measures that have no chance with the people who have real political capital?

      Delete
    3. Actually, I'm just as skeptical of Keynesian ideas as of monetarist ideas. Remember that I was trained in macro by Miles Kimball, who is as much of a monetarist as Sumner.

      Delete
    4. Skeptical of New Keynsian ideas, Old Keynsian ideas, or both?

      Delete
    5. You are skeptical about both? What does it even mean? Is it religion? Models are neither true or false. Just more or less useful in describing relationships between aggregates and responses to shocks/policy changes.

      Delete
  18. Anonymous10:13 AM

    We are far from full employment.
    The employment to population ratio did not increase.
    We did not close the output gap more rapidly.
    I give economic policy in 2013 a D-. The reason I don't give it an F is it did make things much worse.

    OTOH, Those who measure success by high corporate profits, cheap labor and halting increases in government social spending and ignore unemployment (assume full employment) and inequality declare it a success. It depends on your values.

    Based on my values, 2013 proves that the combination of policies adopted is woefully inadequate. The result was not victory.
    We need a big change in policy but lack the political will and cannot come to agreement over the details.

    We are politically divided over the goals of our economic policy. The goal of our governing elites seems to be "More profits for the 1 percent and trickle down, but the lack of trickle down is not the problem of the ruling elites."
    -jonny bakho

    ReplyDelete
  19. But the biggest problem with this sort of inference is that there are just too many free parameters.

    Indeed. To quote the master:

    "With four parameters I can fit an elephant, and with five I can make him wiggle his trunk."
    - Von Neumann

    ReplyDelete
  20. Failure of inflation to materialize over the last four years ---> Inflationistas are wrong!!!!

    Failure of job growth to falter in 2013 ---> Exogenous shocks!!!

    Can someone explain to me the difference?

    ReplyDelete
    Replies
    1. It obviously has to do with "regime change" not happening or something like that. So if there is a rise in unemployment in 2009 it is because of insufficient stimulus (or austerity for that matter) while if there is no rise in unemployment in 2013 despite austerity and Zero Lower Bound still binding it is either because of "regime change" or "other stuff" (with regime change possibly one example of other stuff)

      Still feeling that it does't make any sense and you are still feeling confused? Don't worry, I think it was supposed to be that way. All is well.

      Delete
  21. For the record.

    In response to Krugman’s April 2013 post “Monetarism Falls Short” here is what I wrote:

    http://economistsview.typepad.com/economistsview/2013/04/monetarism-falls-short.html#comment-6a00d83451b33869e2019101a068f8970c

    “The last I checked the Fed had not implemented a policy of nominal GDP level targeting (NGPLT), so when it does, perhaps then we can talk about what NGDPLT has or has not done. However what I do think we’re witnessing is a test, albeit a somewhat complicated one, of the existence or nonexistence of the liquidity trap.

    The four largest currency areas at or near the zero lower bound in central bank policy interest rates are the United States, the Euro area, Japan and the United Kingdom…”

    And I went on to discuss the empirical evidence against the existence of the liquidity trap. Nearly one year later the evidence has only grown that much stronger.

    ReplyDelete
  22. "More importantly, when has there ever been "neutral policy"?

    Certainly not in 2013 where policy was a net drag. I still don't get why it's so difficult to admit that if there had been no sequester we would have had higher growth. I think monetary policy may have somewhat offset it but it clearly didn't entirely do so.

    ReplyDelete
  23. "Mike Konczal thinks 2013 shows that fiscal policy is needed alongside monetary policy."

    January 10, 2013

    Mike Konczal provides two arguments against monetary offset
    By Scott Sumner

    "Mike Konczal has a new post with two arguments against monetary offset. In both cases he suggests that the predictions of “market monetarists” have not panned out. But in only the first case is the prediction even being made by a market monetarist..."

    http://www.themoneyillusion.com/?p=25827

    ReplyDelete
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