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Already in sequestration mode

If you check out the current fiscal stance it is hard not to conclude that we have been under a sort of sequestration mode for a while. Graph below shows the quarterly percent change in total government spending with respect to the previous year.
Note that the numbers have been negative in the last few quarters. This is the result of what Krugman correctly points out in his NYTimes column today, the existence of a growing consensus, since the crisis broke in late 2007, "that fiscal austerity was the appropriate response to an economic crisis caused by runaway bankers." A very short lived Keynesian recovery was allowed, but what really precluded a new Great Depression where automatic stabilizers.

I think that it's very unlikely that the fact that Bernanke, and Stiglitz, as Krugman points out, are for more fiscal stimulus will have any significant impact. I would also add that in part those reasonable New Keynesians (like the ones Krugman cites and himself) that complain about the fact that unreasonable people have taken over not just economic policy, but also the profession, are also partly to blame. You cannot argue that "Joseph Stiglitz, a Nobel laureate and legendary economic theorist whose vocal criticism of our deficit obsession has nonetheless been ignored," without noticing that Bob Lucas, an equally well regarded and Nobel (Sveriges Riksbank Prize) laureate is against deficits.

Comments

  1. Study my Letter on Diana@Philosophyinaction.com.

    (Instead of searching for Crazy Inbox, try p=6498 Jun 5, 2012.)
    Keynes was VERY WRONG-try studying Professor Ludwig von Mises.
    Poliicians handing out $ that they've Stolen from Hard-Working, Productive, Long-Suffering Taxpayers ISN'T "government stimulus of the economy", at all.
    The so-called "federal government" is not only BANKRUPT, it's Head- Over- Heels In Debt, & Operating Way In The Red, & It Has A Huge, & Increasing, Budget Deficit. There's virtually zero $ for anything whatsoever,

    ReplyDelete
    Replies
    1. The empirical evidence for the negative effects of austerity is overwhelming. Multipliers are positive and higher than one. The way for fiscal consolidation is growth, and that requires spending. I recommend you read chapters 2 and 3 in UNCTAD's 2011 Trade and Devvelopment Report (http://unctad.org/en/Docs/tdr2011_en.pdf).

      The Austrian thing is a bit of a religious thing. In spite of all the hoopla on Keynes versus Hayek, in all fairness there is very little to Austrian theory that is not in conventional neoclassical approaches, and that does not share the same problems. And Mises is even less relevant than Hayek. Austrian economics is to economics what astrology is to astronomy.

      Delete
    2. You really believe that a measly 2 1/3% or so "budget cut"- which basically speaking doesn't cut the budget at all- produces Austerity???
      You really should study von Mises- such as his book on Human Action- BEFORE dismissing his ideas.
      So-called "governments","UN officials", etc., LIE their heads off.
      Collectives, such as "countries", have no actual existence.
      $ that the politicians have STOLEN FROM the Hard-Working, Productive, Long-Suffering Taxpayers BELONGS TO the Taxpayers, not to the politicians- it CAN'T BE spent, given away, invested ,etc. by the politicians, nor can it be used to "stimulate" the economy.

      Delete
    3. Hi LeRoy, thanks for the questions. First of all, yes a small amount of venom (austerity) is still venom. Second, I did read quite a bit of Hayek, and even a little of Mises, I should add. Note that everything in those authors is much better in Wicksell, a serious and relevant neoclassical economist, which I studied extensively. Bhöm-Bawerk and Schumpeter, in my view, are the only two Austrians worth reading. Note finally, that beyond the insurmountable logical problems that the capital debates pose to Austrian (as well as any other marginalist) theory, are compounded in the case of austerity by the weight of the evidence suggesting that it doesn't work.

      Delete

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