The unending “Fiscal Fetish”

John Cochrane got a lot of flak for writing An Autopsy for the Keynesians – We were warned that the 2013 sequester meant a recession. Instead, unemployment came down faster than expected.

This year the tide changed in the economy. Growth seems finally to be returning. The tide also changed in economic ideas. The brief resurgence of traditional Keynesian ideas is washing away from the world of economic policy.

Backlash examples:

From the CEPR:

Cochrane then adds:

“With the 2013 sequester, Keynesians warned that reduced spending and the end of 99-week unemployment benefits would drive the economy back to recession. Instead, unemployment came down faster than expected, and growth returned, albeit modestly.”

For my part, I never saw a recession, just weaker growth. The GDP data seem to agree with me. Growth in the first two quarters of 2013 was just 2.3 percent. If we just look at final demand (excluding the buildup of inventories), growth averaged 1.8 percent in the first half of 2013. While the unemployment rate did fall by 1.2 percentage points from December of 2012 to December of 2013, this was largely because of people leaving the labor force. The employment to population ratio did not change over this period. Should us Keynesian types feel embarrassed?

Weaker growth? Since the post-recession bounce-back, average RGDP growth has been 2.2%, very close to growth in the first two quarters of the sequester! The chart illustrates.

From Robert Waldman:

As I note, sequestration did not have a noticible effect on G — it was anticipated (says my FedGov employed dad) and was a shift in Fiscal 2013 budgets which governed spending for the following 7 months. It didn’t cause a jump in Federal spending. It is impossible to guess when Sequestration occured from the time series of US real G.

In fact, during the recovery, percent growth of real G and real GDP are clearly positively correlated. This is exactly the evidence cited by anti-Keynesians. They are a few data points which form a very clear pattern (with an outlier 2014q1 due to weather).

Maybe sequestration did not have a noticeable effect on G. The fall in G had already taken place and as can be observed in the chart, real growth tanked while G was on the rise and kept chugging along at a stable 2.2% rate while it was the turn of real G to take a plunge! For the whole period depicted in the chart the correlation between real output growth and real G growth is significantly NEGATIVE!