Scott Sumner has a new post at EconLog saying that Keynesianism isn’t just resting (in reference to the famous Monty Python “Dead Parrot” sketch). Scott does a great job busting Mike Konczal, who earlier in 2013 had said the year would be a great test for market monetarism vs. Keynesianism. Since the Keynesian warnings about the horrible effects of the sequestration (and government shutdown) totally blew up in their faces (I will document this in a separate post at Mises Canada), Scott is perfectly justified in raising his eyebrow at Konczal’s victory dance now that 2013 has closed.
But being the paragon of mercy and understanding that I am, I wanted to understand how it was possible that Konczal and Sumner could look at the same data, yet each walk away with an opposite verdict. And you know what? The answer is that Konczal wasn’t looking at Keynesianism per se. Rather, he was looking at NGDP growth, and concluded that the story didn’t match what Sumner needs. Specifically, Konczal wrote: “2013 brought us a fiscal deficit that closed far too fast, NGDP growth and inflation falling compared to previous years…”
And here’s the NGDP graph that Konczal linked:
Does that surprise anybody else? From reading Scott’s blog all these years, I sort of expected “the tightest monetary policy since Herbert Hoover” to show really low annual NGDP growth during our abysmal recovery, but that it started picking up in 2013, the year that Scott tells us has been vindicating market monetarism. (Remember, Scott’s original ideal target rate for a healthy economy was 5% NGDP growth.)
Now I know, I know, Scott advocates level targeting, meaning that we have to catch up to where NGDP would have been right now, had we never hit the catastrophe of falling / slowly rising NGDP in 2008-10. But my point is, of course Scott can reconcile the data to his story; anybody can do that. (It’s why Krugman, Scott, and I all think the past 5 years have totally vindicated our basic stories.) But be honest: Did you expect the NGDP graph to look like the above?
Let me give an even better test that puts more pressure on Scott: If his theory is correct, then we should have seen price inflation and real GDP growth moving cyclically, since 2008. (I’m not just speculating; I’ve seen Scott say this explicitly, for example when a QE announcement increases inflation expectations and Scott says it’s proof that QE is “working.” Please give me a link if you can find one.) That’s because in Scott’s view, extra demand (from looser monetary policy) will mostly get sopped up by an increase in real output, but it will also show up in accelerating price inflation.
And yet, I think we arguably see the opposite:
In the above graph, we see that from 2010 onward, there are three distinct periods where the movements in price inflation and real GDP growth are mirror images. To repeat, that’s the opposite of what Scott’s story requires. They should be moving together, at least while we remain below “potential GDP” (or full employment or whatever term Scott prefers).
Don’t get me wrong, I have no problem with Scott dismissing the above chart as irrelevant, or even somehow (heroically) arguing that it just proves how right he is. That’s because in macroeconomics, there are 57 moving parts, and all of us (Austrians, Keynesians, and Market Monetarists) can always tell a story after the fact.
Rather, my purpose in this post is to get Scott and his followers to see that if you just entertain the premise for one moment that our economic woes aren’t because of “tight money,” there are lots of data to comfort you.
When it comes to macroeconomic theory and the data, believing is seeing.