Austerity and Stimulus

I try not to read Krugman too much. He's mendacious to his core and nasty to boot. There's probably some amount of jealously I and others have; after all he gets paid the big bucks and is widely read.

So it's always fun to see the economic community take him to task.

Here's Alex Tabarrok at Marginal Revolution.

 In the 1990s growth was strong even while “austerity” was increasing (falling red line). More recently, we have seen a big increase in austerity according to Krugman and his measure but although there has been no boom, growth has remained modest. As Justin Wolfers tweeted this morning with the strong jobs report, “the recovery has been remarkably persistent, and resilient,” albeit not rapid. Scott Sumner argues that this is bye, bye Keynesian multiplier as monetary policy stands triumphant (also here) which is one possible interpretation.

Jim Pethakoukis adds:

I see it like Tabarrok. I have done a few charts like these and have found the economy holding up pretty well. Here is a twist: I took the Krugman austerity data (red line) and compared it against private-sector GDP (blue line). Even as spending collapses, private-sector GDP bends a bit but does not break.

Here's a longer view and compares Government (total federal, state and local) consumption expenditures and gross investment, the thing that in theory gets multiplied, against total nonfarm payrolls.

 Causality looks like it goes from employment to government spending, which makes sense since state and local government spending is driven by the economy, not visa versa.

None of this "proves" anything. Government spending is one element that has an impact on the economy and this is impacted by the economy. There are a whole bunch of other factors that have an impact on the economy and that are impacted by the economy as well: monetary policy, taxes, regulation, "confidence." etc.

That is why I'm highly skeptical of the Democrat's claims that all we need is a little stimulus and the Republican's claims is all we need is a little tax reform. The economy is a complex system and one thing politicians should have learned, but haven't, is you can't move a dial and flip a switch and presto things are better.