More “Keynes Worshiping”

Before it was Peter Coy with John Maynard Keynes Is the Economist the World Needs Now. Now it´s Anatole Kaletsky with The takeaway from six years of economic troubles? Keynes was right:

The main lesson is that government decisions on taxes and public spending have turned out to be more important as drivers of economic activity than the monetary experiments with zero interest rates and quantitative easing that have dominated media and market attention. Fiscal decisions on budget deficits, taxes and public spending have mostly been debated as if they were largely political choices, with much less influence than monetary policy on macroeconomic outcomes such as inflation, growth and employment. Yet the reality has turned out to be the opposite. While every major economy in the world has followed essentially the same(!) monetary policy since 2008, their fiscal policies have been very different and the divergence in outcomes, especially when we compare the United States and Europe, has been exactly the opposite to what was implied by the rhetoric of most politicians and central banks.

But that´s not right at all. According to the data, the US, for example,  did both more fiscal expansion (measured by the cyclically adjusted fiscal balance) in 2008-09 than the Euro Zone and more fiscal contraction since 2010.

Keynes Worshiping_1

Nevertheless, NGDP in the US dropped by a bit more (relative to trend) in 2008-09 than in the EZ. As the charts indicate NGDP in both “countries” grew at the same rate from the trough to early 2011, diverging after the ECB tightened monetary policy in April and July 2011.

Keynes Worshiping_2

While Fed monetary policy has placed the US in a “monotonic depression”, ECB monetary policy has placed the EZ in an “increasing depression”.

11 thoughts on “More “Keynes Worshiping”

  1. Mmmm, I wouldn’t say that US is in a monotonic depression! You could say that it could happen better, but you should recognize that economy is growing. In Europe is much worse, indeed. We only can see US with envy…On the other hand, I don’t have too much confidence in GDP potential as a secure measure of the best scenario.

    • Miguel, Depression is a situation where the economy is below where it could be. It´s “monotonic” because it´s not changing. In EZ it´s getting worse (deeper). I don´t like the concept of “potential” either. And I don´t refer to it. NGDP is a nominal quantity and the chart shows that the US economy is below where it could be, even if the new possible level is somewhat below the pre recession trend.

  2. Pingback: ECB monetary policy places the EZ in an “increasing depression” | The Corner

  3. Marcus,

    Doesn’t Bill Gross’s argument here fly in the face of the TIPS breakeven’s response to QE2 and QE3?

    “The roughly $7 trillion pumped into the financial system since the financial crisis by the world’s three biggest central banks has succeeded mostly in lifting prices of securities rather than the cost of goods and workers’ wages, he said.

    “Prices go up, but not the right prices,” Gross wrote.


    “One economy (the financial one) thrives, while the other economy (the real one) withers,” he said.”

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