Sunday, February 10, 2013

Fiscal Austerity is Happening Now

Ryan Avent notes that fiscal austerity is happening now:
[T]he record shows that total federal government outlays were 25.2% of GDP in 2009, 24.1% of GDP in 2011, and 22.8% in 2012...Both outlays and receipts are, as a share of GDP, below pre-crisis level... the "austerity" of 2011-2012 wasn't "austerity" but austerity. Federal government spending fell by a meaningful share of GDP over that period. So did federal government employment, which dropped by 31,000 jobs in 2011 and 45,000 jobs in 2012. What's more, we have good reason to believe that these cuts entailed positive multipliers above those we'd observe in normal times. You don't have to take the IMF's word for it; even stimulus sceptics like Valerie Ramey find that multipliers may sometimes be above normal, and above one, during periods of economic slack.
This is exactly the case that I have been making. And apparently so has Goldman Sachs. The only additional point I have stressed is that despite this austerity happening at a time of high unemployment and a large output gap, a slowdown in aggregate demand growth has failed to materialize. This does not mean fiscal policy multipliers are small--they may be large--but only that the Fed has been offsetting the drag created by the fiscal austerity.  And to boot, it has done so in an environment where the short-term interest rate is up against the zero-lower bound (ZLB). Monetary policy, therefore, is not out of ammunition at the ZLB, as I noted in my last post on this issue.

Just to be thorough, below are some figures that demonstrate the fiscal austerity observed by Ryan Avent. First, here is total federal government expenditures in current dollars. It has stalled and gradually started to fall:


As a percent of NGDP, total federal government expenditures is steeply falling. Not exactly a Keynesian prescription for stable aggregate demand when the economy is far from full employment:


If we look at the federal government deficit, whether in dollars or as a percent of GDP, it too indicates increasing fiscal austerity given the ongoing slack in the economy. Recall that running a deficit is how the government takes "idle" private-sector savings and puts it to "productive" work. Less and less of this transformation is being done:


Finally, if we look at those components that make up the "G" in GDP (i.e. Y=C+I+G+NX) in inflation-adjusted terms we see that G has been unequivocally falling:


Now this fiscal austerity is mild compared to what is proposed to happen going forward. But it is still fiscal consolidation and given large fiscal multipliers--which are more plausible in periods of significant economic slack like today--we should at least see aggregate demand faltering over the past few years while this unfolded. But in fact, we see relatively stable aggregate demand growth, as measured by NGDP:


This remarkably stable NGDP growth path since 2009 has occurred despite the fiscal austerity (and a host of other negative economic shocks like the Eurozone crisis, China slowing, debt ceiling talks, and fiscal cliff) and only makes sense if the Fed has been offsetting the fiscal drag.  And again, it has been doing so in a ZLB environment. While the Fed's success here should be recognized, it is also apparent that the Fed has failed to restore NGDP to its pre-crisis trend. This failure to provide "catch-up" nominal spending growth is big black eye for the Fed and is why a NGDP level target is way overdue for the Fed.

P.S. Ramesh Ponnuru and I made a similar argument during the fiscal cliff debacle.

11 comments:

  1. David
    And at another point in time, despite rising interest rates AND fiscal consolidation, rgdp growth kept humming along!Just a reminder that MP is not about interest rate.
    http://thefaintofheart.wordpress.com/2013/02/08/what-if-the-liquidity-trap-is-a-myth/

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  2. Didn't the government just report a quarter of negative growth? I understand that that number is expected to be revised up a bit, but it will still turn out to be the worst quarter since 2009. So how do we get "stable aggregate demand" from that?

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  3. You get "stable aggregate demand" by looking at more than 1 quarter of data. It was, in fact, fiscal policy that caused the particular weakness reported in Q4, but that was fiscal policy of an idiosyncratic kind, as practiced by Pentagon budget guys. Over the entire post-recession period, though, stable aggregate demand growth is more or less what we have. It just happens to be growth that's too slow to bring unemployed assets back to work.

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  4. Seems to be a selective use of timelines. In 2007 sending as a % of GDP was under 20%. How is raising spending in absolute terms and over 20% as a percent of GDP austerity?

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    Replies
    1. I think the author's point is a relative decline, though the first figure suggests there has been mild,absolute dollar decline too.

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  5. David -

    Yes, your graphs all show relative austerity. Except for total government expenditure/GDP - yes falling rapidly, but still higher than any pre-2007 nuumber. And relative is relative. I still think you are considering austerity in absolutist terms.

    We now have the slowest growth in real personal consumption expenditures, % change YoY, of any non-recessionary period in the WW II era. In fact, by that measure, this is the most anemic recovery on record.

    http://research.stlouisfed.org/fred2/graph/?g=fsL

    If you prefer GDP growth, this "remarkably stable" measure [% change YoY] has plateaued at or below the level of troughs in the last 8 recessions, going back to 1960. So, by that measure, this is the most anemic recovery on record.

    Unemployment has fallen, but remains at a level above that of most recessions.

    http://research.stlouisfed.org/fred2/graph/?g=fsO

    The worst recovery in my life time is pretty dismal success. Plus, wealth and income disparity continue to increase. With sequester looming, I think we're in for a very rough ride.

    JzB

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  6. Print more money, and keep printing more money until you see some real zip in RGDP growth.

    Then print a lot more money and see what happens. Maybe then, think about tightening up a bit.

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  7. Prof. Beckworth,

    Greetings! This is TravisV from Scott Sumner's blog.

    I’ve heard you argue in the past that rapid NGDP growth above 5% in 2005 and 2006 was a major contributor to the housing bubble.

    If that’s true, then……why didn’t we have any similar crazy asset bubbles during the 1970′s (when NGDP grew much more rapidly)?

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    Replies
    1. The answer is that there was a productivity boom on the early-to-mid 2000s that needed interest rates to rise (and inflation to fall) for monetary policy to remain neutral. That was not the case in the 1970s; productivity was actually falling. There is a chapter in my book on this point. Below are some links that speak to the issue as well:

      1.) http://macromarketmusings.blogspot.com/2011/01/having-my-cake-and-eating-it-too.html

      2.)http://macromarketmusings.blogspot.com/2010/09/what-role-did-fed-play-in-housing.html

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  8. "While the Fed's success here should be recognized, it is also apparent that the Fed has failed to restore NGDP to its pre-crisis trend. This failure to provide "catch-up" nominal spending growth is big black eye for the Fed and is why a NGDP level target is way overdue for the Fed."

    The status quo of non-catch-up stable AD growth, and "catch up" AD growth, converge over time. We've had 4 years and counting of stable NGDP growth. I would think that monetary policy has done pretty much all it can at this point. Any significant resource and/or labor problems are likely "structural" in nature. If people don't have jobs after 4 years of looking in an economy with stable NGDP growth, then the problem is obviously not AD.

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    ReplyDelete