Believing Is Seeing, Part II
“Lord Keynes” provided the most beautiful confirmation possible in the comments of my recent post. Recall that I had teased a guy for simply assuming the Keynesian theory was correct, when interpreting the economic statistics. Lord Keynes upbraided me:
As opposed to your last post, where the data strongly confirms the Keynesian story, but not yours?
If stimulus is counterproductive, then why didn’t real output plunge even further when the stimulus was implemented?
Here’s the chart of total federal expenditures vs. real GDP:
So, the data did exactly what Lord Keynes denied had happened. Yet he literally can’t see this, because he is so sure that extra government spending, other things equal, will boost a depressed economy. He’ll look at that chart and “see” that real GDP was poised to collapse even further, but finally bottomed out (after a lag) because of the Obama stimulus in early 2009.
Also apropos, let’s consider the counterfactuals: The Keynesian economists with their names on the White House analysis of the stimulus package, infamously predicted that the economy without stimulus would have a lower unemployment rate, than what the economy actually ended up getting with stimulus. There could not be a better example of exactly what Lord Keynes had demanded. The economy looked like it was on trajectory A, they implemented the stimulus, and all of a sudden “oh shoot, the economy was worse than we realized.”
(Yes yes, some Keynesians said it wouldn’t be enough. Just like some Austrians and fellow travelers [like Vijay Boyapati and Mish] said deleveraging would lead to tame CPI increases, if not outright price deflation. Yet I don’t see Lord Keynes or Krugman pleading for nuance when discussing the predictions of “the austerian camp” regarding the economy in the last four years.)
So, the data did exactly what Lord Keynes denied had happened.
Not at all. You are assuming that I meant that real output must have started expanding immediately after the stimulus was began. If you have interpreted what I wrote that way, I should have expressed myself more clearly.
Obviously, the change induced in private investment is not immediate. It takes time.
From early 2009, your data show real output expansion and then YEARS of such expansion WITH rising government spending under a stimulus.
Once it is made clear that one should expect some lag as the stimulus did its work before real output growth resumed, how does this graph not confirm the Keynesian view?
Can you explain why for years here (2009-2011) is a clear correlation here between GDP growth and the stimulus?
“Yes yes, some Keynesians said it wouldn’t be enough.”
Bingo.
“Once it is made clear that one should expect some lag as the stimulus did its work before real output growth resumed, how does this graph not confirm the Keynesian view?”
Given that one should expect increased government activity to impede real private investment activity and make it lower than it otherwise would have been had the increased government activity not taken place at all, how does this graph not confirm that laissez-faire view?
“Can you explain why for years here (2009-2011) is a clear correlation here between GDP growth and the stimulus?”
Possibility: The growth rate in government activity started to decline in 2009, which allowed real private investment to increase.
“Bingo.”
Murphy: “Yet I don’t see Lord Keynes or Krugman pleading for nuance when discussing the predictions of “the austerian camp” regarding the economy in the last four years.)”
Did you miss that part?
Bob,
And of course, Market Monetarists attribute the stable NGDP to the Fed: http://macromarketmusings.blogspot.com/2013/02/fiscal-austerity-is-happening-now.html
I already posted this link on another entry:
http://www.politicsdebunked.com/article-list/spendingpattern
Showing a related graph and more data that typically the faster government spending grows, the slower the private economy grows, and vice versa. The pattern appears in the US and around the world, though the page leaves cause and effect open to question. It points out the difficulty of assessing cause and effect, noting the sort of traps that those claiming to have found Keynesian patterns in the data may fall into. Unfortunately with sparse data too much of economics is like looking at ink blots or clouds and finding patterns, and then using questionable statistics to show they are meaningful when it is difficult to isolate the myriad factors that come into play.
As someone from the tech biz world, it is astonishing how much some ivory tower economists seem to be able to obfuscate the real world to try to avoid facing it.
It is important to come back to simple realities to try to sort out how to make decisions while the data is unclear, like the “crowding out” impact of government debt that Keynesians try to downplay and deny exists. It seems they are the ones that need to demonstrate that it doesn’t since it is simple logic that it will. An investor can only do 1 of a set of alternatives with each $: lend it to the government, invest it privately in the US, invest it outside the US, or stuff it into a mattress. If government doesn’t borrow it, odds are it will be invested privately in the US even merely giving the distribution of how the rest of the $ not lent to government are invested. They need to show that isn’t likely to happen.
They need to show why “digging a ditch and filling it in” is more productive than the money being spent to grow a business and create jobs. Obviously in each case the money then flows on throughout the economy, there is no magic “multiplier” in the government case that doesn’t exist in the private case where the $ somehow improves the economy more afterwards if it was spent by government on a salary rather than a private economy.
Mr. Murphy, I think you’re in cloud-cookoo-land on this one… The “stimulus” you assert was such a big deal was about $800B and half of it was simply tax decreases (ie, it’s effects are amortized over the rest of the year and subsequent years). Meanwhile, the lost asset values (ie lost wealth, ie money people thought they would have and could spend against) over the course of the collapse was north of 10x more than the non-tax-reduction “stimulus”. And this stimulus was passed in early 2009.
So now go look at the graph – and the subsequent one in your later posts. GDP indicates an inflection point “up” (that’s real calculus for anyone not familiar) as a result of the stimulus passage, and then continues a positive march.
So what is not to understand here? Surely you are not saying that the fall in GDP through 2008 is what happened as a result of the stimulus? And surely you realize that counter-cyclical Federal spending is what most of the rise in 2008-2009 came from, not the separate “stimulus”….?
I mean, how exactly is $400B in “oh, you can keep that” money (tax reductions) and $400B in “hey, here’s some cash – go spend it!” money – how does that restore the spending that would have been based on $4T+ extra wealth that suddenly disappeared from the economy, due to falling market prices on everything from investments to house values to stock and bond portfolios? It simply can’t. It can *help*…. *MARGINALLY*….
Furthermore, in your later posts on this, you show the falling “Private Investment”. It seems you think this indicates something positive about your case…? It doesn’t: it just shows that the private sector had less capital to invest or use to pay down debts. What could your point possibly be?
Of course the stimulus was too small! The problem of unemployment didn’t get resolved!
THE. THEORY. IS. SOUND.
(and unfalsifiable)