Sumner and his friends are declaring Keynesianism 'dead' and that they've achieved eternal victory because of: a 2.2% U.S. GDP growth rate.
http://diaryofarepublicanhater.blogspot.com/2015/01/john-c-goodman-tries-to-richard-rorty.html
After all, Keynesians argue that with fiscal austerity you'd expect to see a slower economy but 2.2% GDP puts that one to bed! Delong had a great post: short, sweet and to the point.
http://delong.typepad.com/sdj/2015/01/why-yes-i-do-believe-jeffrey-sachs-has-lost-his-mind-why-do-you-ask-live-from-the-roasterie.html
However, Simon-Wren Lewis puts the matter very well. First of all, I'm totally feeling him here:
"I do not normally talk much about the US economy, because there are so many others writing articles and posts that can do so with more authority. But I am getting increasingly fed up with people telling me that US growth disproves the idea that austerity is bad for you at the Zero Lower Bound (ZLB). Jeffrey Sachs just joins a long list."
http://mainlymacro.blogspot.co.uk/2015/01/sachs-and-age-of-diminished-expectations.html
Uh, as an American I know exactly what he means-it is very annoying and if he's fed up imagine how Americans like me feel about it! I can only say Amen to that sentiment. He really crystallizes the point well here:
"Of course the proper way to tackle this is as Paul Krugman does. As he says other stuff happens (like alarge fall in the US savings ratio in 2013), so you need to go beyond a single country and look at lots of data. However this might leave the impression that somehow the US case is unusual and does not fit a Keynesian story. In this respect I did a simple exercise, the results of which are shown in the chart. It shows actual US GDP, and a hypothetical path based on 2% real growth in government consumption and investment from 2009. So instead of austerity, we maintained government spending at the elevated levels seen at the bottom of the recession. In addition I’ve assumed quite a large (and instantaneous) multiplier of two on that extra government spending.
http://diaryofarepublicanhater.blogspot.com/2015/01/john-c-goodman-tries-to-richard-rorty.html
After all, Keynesians argue that with fiscal austerity you'd expect to see a slower economy but 2.2% GDP puts that one to bed! Delong had a great post: short, sweet and to the point.
http://delong.typepad.com/sdj/2015/01/why-yes-i-do-believe-jeffrey-sachs-has-lost-his-mind-why-do-you-ask-live-from-the-roasterie.html
However, Simon-Wren Lewis puts the matter very well. First of all, I'm totally feeling him here:
"I do not normally talk much about the US economy, because there are so many others writing articles and posts that can do so with more authority. But I am getting increasingly fed up with people telling me that US growth disproves the idea that austerity is bad for you at the Zero Lower Bound (ZLB). Jeffrey Sachs just joins a long list."
http://mainlymacro.blogspot.co.uk/2015/01/sachs-and-age-of-diminished-expectations.html
Uh, as an American I know exactly what he means-it is very annoying and if he's fed up imagine how Americans like me feel about it! I can only say Amen to that sentiment. He really crystallizes the point well here:
"Of course the proper way to tackle this is as Paul Krugman does. As he says other stuff happens (like alarge fall in the US savings ratio in 2013), so you need to go beyond a single country and look at lots of data. However this might leave the impression that somehow the US case is unusual and does not fit a Keynesian story. In this respect I did a simple exercise, the results of which are shown in the chart. It shows actual US GDP, and a hypothetical path based on 2% real growth in government consumption and investment from 2009. So instead of austerity, we maintained government spending at the elevated levels seen at the bottom of the recession. In addition I’ve assumed quite a large (and instantaneous) multiplier of two on that extra government spending.
 |
| US GDP, billions of chained 2009 US dollars. |
"Now if the US recovery proved that Keynesian analysis was wrong, we should get nonsense out of an exercise of this kind. If the recovery was just fine with austerity then replacing it with something like fiscal stimulus and assuming a large multiplier should give us ridiculous rates of growth. Yet as you can see, the no-austerity GDP path looks perfectly plausible. What we get is 3.4% growth in 2010 (compared to an actual of 2.5%), followed by three years of 3.7% growth (compared to 1.6%, 2.3% and 2.2%). In other words we get a reasonably rapid recovery from a deep recession. Obviously there are more sophisticated ways of doing this kind of counterfactual, but maybe something very simple can make the point. With recent US experience, there is no case against Keynesian analysis to answer."
"This suggests to me two things. First, lots of people are desperate to show that critics of austerity at the ZLB are wrong, and are prepared to make nonsense arguments to that end. This may be particularly true if you very publicly proclaimed the need for austerity in 2010 (note the co-author: HT John McHale). Second, it is a sad day when anyone thinks that 2.3% growth is “brisk” when we are recovering from a deep recession and interest rates have remained at the ZLB. It is so very dangerous when these diminished expectations become internalised by the elite."
Yes, of course! This is a point I've often tried to make to Sumner-but obviously that's talking to someone with dead ears. Unless you think 2.2% GDP is optimum coming out of such a deep recession how can you say there was no room for improvement?
Of course, the other argument that Sumner would retreat to here is monetary offset-if we hadn't done austerity the Fed would have tightened monetary policy, it wouldn't have done QE3. However, even here Wren-Lewis really crystallizes things: if fiscal austerity and QE3 add up to give us 2.2% GDP growth you still have lots of room for improvement that could have been filled by: not doing austerity.
If the 3.7% hypothetical multiplier growth had been what actually happened, then Sumner and his fellow austerians would be on somewhat less shaky ground.
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