At the Freeman I take on the recent Business Insider article. An excerpt:
Edwards seems to think that the above chart shows at least a correlation between government spending and economic growth. After all, he wrote that the BEA chart “seems to show that government has a pretty straightforward effect on GDP.” But as Scott Sumner pointed out in amusement when he saw the article, the chart does nothing of the kind.
Look carefully at the legend. The various colored rectangles are different components of government spending. Specifically, the rectangles indicate how the change in each component — positive or negative — relates to the change in overall GDP. The black line is not GDP growth, but is instead the sum of the various components of government spending. In short, Matt Klein at the FT is telling us that if we take the BEA’s word for how much each component of government spending contributed to GDP growth in each quarter, then we can stack those numbers on top of each other and even add them up! Contrary to Edwards, the FT chart doesn’t “show” anything at all, except that the BEA each quarter announces how much various components of government spending contributed to, or subtracted from, GDP growth.
The exact opposite happened with the so-called sequester. For example, the firm Macroeconomic Advisers, using a Keynesian model, predicted that the spending cuts would knock 1.3 percentage points off of second quarter 2013 growth, and 0.6 percentage points off of third quarter 2013 growth. Here’s what really happened:
It’s the mirror image of the Keynesians’ stimulus blunder. The economy grew faster with the sequester than the Keynesians said would occur without the “drag” of the spending cuts. In the case of the Obama stimulus, their excuse was, “Wow, the economy was worse than we realized, good thing we got that deficit spending in there, inadequate though it was.” In the case of the sequester, their response would have to be, “How about that, the economy was stronger than any of us realized. We dodged a bullet, since the sequester dragged down growth so much.”