Sunday, May 5, 2013

Alex Tabarrok on Tyler Cowens’ Marginal Revolution Forum Demonstrates that Krugman (and the rest of us) Are Right

Even As He Says Krugman et. al. are Wrong

Those who would deny basic economic theory like the Keynesian model and the zero interest bound of monetary policy have some new data.  Alex Tabarrok charts economic growth against fiscal stimulus and has this graph. The red line is a measure of fiscal stimulus, the green line a measure of economic growth.


He then reaches two conclusions.  The first is that the experience in the 1990’s shows contractionary fiscal policy did not contract the economy.

I assume that by very bad policy what Krugman means is a policy that is likely to have very bad effects. Hence, I have added to Krugman’s graph the growth rate of real gdp (annual rate). I don’t see the very bad effects. In the 1990s growth was strong even while “austerity” was increasing (falling red line). 

And the second conclusion is that contractionary policy after the 2009 Stimulus did not impact the economy. 

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.

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These are, of course, totally erroneous conclusions, ones driven by ideology and a desire to reach a pre-determined determination.  Take the 1990’s.  What the chart shows is the normal and reasonable relationship between fiscal activity and economic growth after a full fledged recovery has taken place.  As the economy grew under President Clinton, government spending relative to the economy was able to decline.  Less help was needed for the unemployed and lower government spending relative to the economy was the right prescription.  The private sector did fine without stimulus, and the result was a balanced budget.

Far from contradicting Krugman and others, the chart shows just what he says should and will happen.  That as the economy recovers as a result of large deficit spending, proper policy will then be to bring the deficit down.  Once stimulated properly, the economy does quite nicely on its own, thank you very much.

For the current recovery the charts also confirms Keynesian economics.  Note the almost exact correlation between the Stimulus and the resumption of economic growth in 2009-10.  Then note how when the Stimulus was prematurely ended the growth was truncated.  Current policy is a fairly large deficit by historical standards, but not nearly enough stimulus to make the economy grow.  Hence the flattened growth line after mid 2010.

So no, reality, the world objective people live in says that basic Keynesian economics is sound, the policy prescriptions are correct and that current monetary policy is ineffective.  To reach an otherwise conclusion one has to move outside reality, as apparently Mr. Tabarrok does.

Sigh, so much ignorance, so little time.  Sigh


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