Poor Alex Tabarrok. He makes a simple blog post, pointing out the hilarious heads-we-win-tails-you-lose stance of Krugman et al., and the targets of his critique focus on something completely incidental. I will probably muddy the waters myself by focusing on the “incidental” part of his post, but so be it. First, though, let’s review:
1) On April 27, Mike Konczal argued that the new GDP report put the nail in the coffin of the market monetarists versus the Keynesians: The Fed had ramped up its asset purchases, while the Congress slashed spending, and oh man the economy is awful. Krugman agreed with Konczal.
2) Scott Sumner said wait a tic, the GDP report shows stronger growth last quarter than the two years before the (alleged) austerity. So huh?
3) Then the surprisingly good (in blogosphere circles) jobs report came out. Now Krugman et al. are really in an awkward spot. They just set up a test, saying the current state of the economy is an up-or-down vote on Sumner vs. Krugman, and it’s not looking so hot for the Nobel laureate. Scott Sumner claims victory in his ever-so-subtle style.
4) Alex Tabarrok tries to be very calm and professional about it. He takes the very measure of “austerity” that Krugman used–total government expenditures as a share of “potential GDP”–and shows that yes indeed, that measure has fallen like a rock; it’s down 3 percentage points over the last 3 years (those are my estimates from eyeballing the chart). And yet, real economic growth hasn’t suffered at all in this period. So Tabarrok wants Krugman et al. to explain this anomaly. Krugman has been warning his readers that US austerity is really awful when we’re in a fix like we’re in right now, and yet, according to Krugman’s measure of “austerity,” the awfulness has been happening for more than 2 years, with apparently no negative effect on growth.
5) Unfortunately, Tabarrok also wrote a single sentence in his post about his chart during the 1990s Clinton boom. This is what Krugman seized upon, in his I’m-surrounded-by-frickin-idiots response.
6) Matt Yglesias beat up on Tabarrok a bit too, but eventually came around to kinda sorta admitting yeah, Sumner wins the Internet.
7) On Twitter, Tabarrok tries to walk back his single sentence about the 90s, and wants the Internet Keynesians to focus on the fact that one week ago, Konczal said the GDP report proved Krugman beats Sumner, so why doesn’t the jobs report prove the opposite? (And also, why is an increase in GDP growth proof that Sumner is wrong?!) As far as I could see, no Internet Keynesian even attempted to answer him. They just wanted to make sure he realized how utterly stupid his single sentence about the 1990s was.
Anyway, let me engage in the acme of foolishness by looking at the Clinton boom. The problem was that Alex had mentioned that Krugman’s preferred austerity measure fell sharply during the 1990s, even as the economy boomed. Yglesias, DeLong, et al. jumped in to say Alex was forgetting the all-important zero lower bound: Because the fed funds rate was positive during the 1990s, the Fed could easily offset the impact of lower aggregate demand, emanating from (relative) cuts to government spending.
So at this point, I thought to myself, “Bob, what would the data have to look like, to make this excuse appear totally wrong?” Well, if you saw Krugman’s “austerity” measure going through the roof, and you saw the economy booming in response, and you saw the Fed raise (real) interest rates, then that would sorta mess up DeLong and Yglesias’ story, right? I mean, suppose for the sake of argument the data looked like this:
The chart above shows that total government spending as a share of potential GDP (red line) went from about 34% in 1993 to 31.5% by late 1998. That’s some severe fiscal tightening.
And yet, the economy didn’t suffer. Year/year real GDP growth (green line) stayed strong throughout the period, and was hitting 5 percent by late 1998. Hmm that’s kind of weird, right? How is it possible that we had severe fiscal tightening, while the economy continued to boom?
Oh, it’s because we weren’t at the zero lower bound! Thus the Fed must have engaged in looser money to offset the fiscal contraction. You can see this in the blue line above, where the fed funds rate minus the yr/yr CPI inflation rate increased by 400 basis points over the period in question. Wait what–?!
Don’t worry, kids, no Keynesian was harmed in the making of this blog post. They can just say, “Oh c’mon Murphy, man you guys are dumb. The economy was obviously booming hard. In the absence of the government ‘cuts,’ Greenspan would have had to raise inflation-adjusted interest rates by, say, 600 basis points. But since the government pulled back its spending, Greenspan only raised them 400 points. Thus monetary offset of the fiscal contraction. Duh.”
Finally, note that I’m not even saying it would be intellectually dishonest for our Keynesian friends to make that move. But they should at least have the decency to stop pretending their position is objectively based on the hard data, whereas their opponents walk around with confirmation bias.