More From Scott Sumner On Why Austerity Did Not Hurt The Economy

See Russ Roberts vs. Simon Wren-Lewis.

"I have repeatedly pointed out that the US government did a massive amount of austerity in 2013, and yet GDP growth was higher than during 2012. One would think that Keynesians would have a response to my claim, a response that addresses the specific points that I made. Unfortunately, that has not been the case.

Russ Roberts recently did a post pointing to this problem:

When there was an increase in the payroll tax in January 2013 and the sequester reduced spending beginning in March 2013, Krugman wrote that monetary policy, which was expansionary, would not be able to offset the impact of fiscal policy:

...as Mike Konczal points out, we are in effect getting a test of the market monetarist view right now, with the Fed having adopted more expansionary policies even as fiscal policy tightens... 

Sorry, guys, but as a practical matter the Fed - while it should be doing more - can't make up for contractionary fiscal policy in the face of a depressed economy.

When the economy grew more quickly in 2013 than in 2012, the test was no longer a test. Here is Krugman in January of 2014:

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.

Strange answer. As Scott Sumner pointed out, it wasn't that growth didn't collapse. The economy grew faster, particularly in the 3rd and 4th quarter when the sequester took effect. But the key is the phrase in the last sentence-the reference to "other stuff." Krugman's answer is that if it weren't for "other stuff" the economy would have collapsed. There is always "other stuff."

When it's convenient, Krugman ignores the "other stuff." (We all do.) So according to Krugman, the economy of Kansas is struggling because the governor cut taxes. One variable explains everything. We can ignore the other stuff. Or Iceland is doing better than Ireland because Iceland didn't listen to those foolish austerians and rejected the fiscal austerity that Ireland fell prey to. One variable, fiscal policy, explains everything. When it's convenient, when it confirms our worldview, the other stuff can be ignored. More troubling for Krugman's claims is that it appears that Iceland actually embraced austerity big time--raising taxes and cutting spending. How will Krugman explain Iceland's success? Must be other stuff. But there is always other stuff. The world is a complicated place. I would suggest that our job as economists is to always remember the existence of other stuff, all the time and not just when it's convenient.

Roberts is right, and indeed it's even worse than he suggests. The government did not just increase payroll taxes at the beginning of 2013, income taxes also rose.

This seems like a pretty convincing argument, and thus you'd expect a serious response from Keynesians economists. Instead, here's what Simon Wren-Lewis said:

To illustrate their belief that Keynesians ignore awkward facts both the authors above use the example of US growth following the 2013 sequester. (In my experience anti-Keynesians tend to shy away from data series, and especially econometrics, and prefer evidence of the 'they said this, and it didn't happen' kind - particularly if 'they' happens to be Paul Krugman.) The problem is that this episode actually illustrates the opposite: that anti-Keynesians are so keen to grasp anything that appears to conflict with Keynesian ideas that they fail to do simple analysis and ignore others that do. In this post I just looked at the data and did some simple arithmetic to show that this episode was quite consistent with Keynesian fiscal policy analysis. I'm sure others have done the same. But such analysis just gets ignored: they have a superficially good story, and that is all that matters. (Read this post to see how Scott Sumner in response to my work dug himself an even deeper hole.)

So I checked the post that supposedly refuted my views, and found that Wren-Lewis was wrong on both issues he raises. First, he addresses my claim that when examining the effects of the austerity that began on January 1st, you need to use Q4 over Q4 growth rates, not year-over-year growth rates. I doubt if there's a single serious macroeconomist who would disagree with me. And yet all he does is respond with snark, he doesn't even address my complaint. I think it's fair to say he doesn't have any argument against my claim, because there are no good arguments against my claim.

He second claim is to deny that austerity occurred in 2013. This claim boggles the mind, as the budget deficit fell by $500 billion in calendar 2013, from a bit over $1 trillion to a bit over $500 billion. (You need to use calendar year data because the austerity began January 1st, and the fiscal year begins October 1st.) Of course there's also that letter signed by 350 Keynesians warning that the 2013 austerity could lead to recession.

So Wren-Lewis must have some sort of evidence for the claim of no austerity. Yes he does, but the evidence is of no relevance. He cites data on government output. But of course that's not the variable used to measure austerity in the Keynesian model, as it excludes both tax changes and transfer changes, which are the majority of fiscal policy in the modern world. So Wren-Lewis argues I am wrong by citing data that even Keynesian economists would admit has no bearing on the argument. Or does he want to argue those deep pension reductions being forced on Greece are not "austerity"?
I also find his claim that my side doesn't do econometrics to be rather breathtaking in its audacity. We've done econometric studies that refute Keynesian econometric studies, and done many posts discussing those results. But as far as I know, no Keynesian blogger has ever responded to any of our studies. Over at TheMoneyIllusion I will do a post later today with recent empirical work by Mark Sadowski. I expect Keynesians to ignore this one too.

Simon Wren-Lewis seems to call for civil discourse in blogosphere debates. He starts off his recent post quoting Russ Roberts:

"The evidence for the Keynesian worldview is very mixed. Most economists come down in favor or against it because of their prior ideological beliefs. Krugman is a Keynesian because he wants bigger government. I'm an anti-Keynesian because I want smaller government."

And then responding:

Statements like this tell us rather a lot about those who make them.

But here's the title of Wren-Lewis's post criticizing mine:

"Faith based macroeconomics."

I guess that's why liberal economists like Jeffrey Sachs think fiscal stimulus has failed---blind faith in laissez-faire economics."