Does Steady GDP Growth “Prove” that Market Monetarists Are Right About Ineffective Fiscal Policy and Foolish Keynesianism?

May 31st, 2013

You’re seeing a lot of crowing these days from the likes of Scott Sumner, David Beckworth, Lars Christensen, et al., claiming that fiscal austerity has obviously had no effect on GDP growth.

“Look!” they say: “Even with the sequester and all the other government spending cuts, growth in 2013 has been the same as 2012! The notion that government spending affects GDP growth (“Keynesianism”) is obviously false and stupid.”

As Scott says in a recent post:

The left predicts fiscal austerity will slow the recovery, and yet both GDP and jobs are actually a bit ahead of the 2012 pace so far this year.

This is specious reasoning.

1. The “left” prediction has been that “fiscal austerity will will slow the recovery” relative to what it would be otherwise, not relative to 2012, or Q1 2012. Scott, not the lefties, chose 2012 as the benchmark. But I know they know: when you compare 2012 to 2013, ceteris is not paribus.

Look at the four highlighted numbers here, showing growth/decline in the two GDP-component numbers that dominate our economy:

Chained 2005 $, %, AR Q1’13 (2nd Estimate) Q1’13 (Advance) Q4’12 Q3’12 Q1 Y/Y 2012 2011 2010
Gross Domestic Product 2.4 2.5 0.4 3.1 1.8 2.2 1.8 2.4
 Inventory Effect 0.6 1.0 -1.5 0.7 -0.1 0.2 -0.2 1.5
Final Sales 1.8 1.5 1.9 2.4 1.9 2.1 2.0 0.9
 Foreign Trade Effect -0.2 -0.5 0.3 0.4 0.2 0.1 0.2 -0.4
Domestic Final Sales 1.9 1.9 1.5 1.9 1.7 1.9 1.8 1.3
Demand Components
Personal Consumption 3.4 3.2 1.8 1.6 2.1 1.9 2.5 1.8
Business Fixed Investment 2.2 2.1 13.1 -1.8 4.1 8.0 8.6 0.7
Residential Investment 12.0 12.6 17.5 13.6 12.8 12.1 -1.4 -3.1
Government Spending -4.9 -4.1 -7.0 3.9 -2.3 -1.7 -3.1 0.6
Chain-Type Price Index
GDP 1.1 1.2 1.0 2.7 1.6 1.8 2.1 1.3
Personal Consumption Expenditures 1.0 0.9 1.6 1.6 1.2 1.8 2.4 1.9
   PCE less Food & Energy 1.2 1.2 1.0 1.1 1.3 1.7 1.4 1.5

Haver Analytics

Personal consumption growth (roughly 70% of the economy) is way up. Shouldn’t we expect 2013 to be kicking 2012’s anemic little butt? You gotta ask: If government spending (20% of GDP) weren’t such a drag, would we (finally) be experiencing robust growth? (Business investment growth also dropped, but 1. it remained positive, still adding to growth, and 2. it’s only 10% of the economy. Residential investment is less than 5%.)

See here, from one far better-credentialed than I:

All else being equal, growth in 2013 should be better than 2012, because the headwinds holding it back are diminishing,” said Michelle Girard, chief economist of RBS. “The impact of the fiscal drag isn’t things getting worse, it’s the absence of things getting much better.”

2.  The market monetarists’ whole theory is that fiscal policy doesn’t matter (nor, apparently, does anything else) because the Fed will always offset it with monetary policy. So according to their theory, the steady GDP growth is because the Fed has offset the fiscal drag.

But: the Fed has made basically zero changes to policy or guidance since its big announcement on December 12 ($85 billion in Treasury/MBS purchases until unemployment’s below 6.5% or inflation’s at 2.5%), except to state unequivocally that “fiscal policy is restraining economic growth.”

Now maybe the market monetarists want to argue that the December 12 announcement was pre-emptive, proleptically adjusting for the sequester etc. that hadn’t even been legislated yet. In which case their theory would be correct. But that’s suggesting a remarkably prescient reaction function by the Fed, one that I don’t think even market monetarists would want to lay claim to.

Cross-posted at Angry Bear.

  1. May 31st, 2013 at 09:58 | #1

    There is also this at

    30. May 2013 at 10:11

    “Wage and salary disbursements are now estimated to have
    increased $171.7 billion in the fourth quarter of 2012, an upward revision of $100.9 billion.
    These estimates reflect newly available wage and salary tabulations for the fourth quarter
    from the BLS quarterly census of employment and wages”

    Perhaps this helps explain why ‘austerity’ in the beginning of the new year had little effect on spending in the beginning of Q1. Workers made $100b more than originally estimated at the end of Q4. This probably offset a portion of it in the beginning of the year.

    If so, I’d guess a lot of this was done to avoid the tax increase.

  2. May 31st, 2013 at 10:32 | #2

    @Fed Up

    I’m thinking that’s reflected in the two Q1 ’13 columns, above?

  3. June 1st, 2013 at 13:50 | #3


    I’m guessing that is in the Q1 2013 personal consumption demand component.

  4. June 5th, 2013 at 14:17 | #4

    Here is this:

    “A gauge of labor-related costs fell in the first quarter by the most in four years, although the reading appeared to be distorted by a shift in employee compensation during the prior period to avoid a tax hike.

    Unit labor costs fell at a 4.3 percent annual rate during the period, revised readings from the Labor Department showed on Wednesday. The government had initially estimated a 0.5 percent gain, and the downward revision confounded analysts’ expectations that the reading would remain unrevised.

    However, the government revised sharply higher its estimates for employee compensation during the fourth quarter after incorporating new data sources.

    That brought the readings more in line with other indicators of wages which have suggested that employers pulled forward compensation for staff into the fourth quarter so that employees would pay taxes on that income at 2012 tax rates. Washington raised tax rates in January.”

  5. June 7th, 2013 at 09:06 | #5

    @Fed Up

    Thanks. Good info.

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