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Did 2013 Prove That Fiscal Stimulus Doesn’t Work?

Scott Sumner has confidently declared that the 2013 growth figures prove that fiscal stimulus doesn’t work.  And he says so because a lot of Keynesians came out prior to 2013 declaring that the sequester would torpedo the economic recovery.  But since the economy was actually quite strong in 2013 during a period of fiscal tightening then Sumner says this MUST mean that fiscal policy failed.

There’s just one big problem with this analysis.  Some Keynesians (if you want to bunch anyone who supports fiscal policy at all, like myself, at times – though not at all times), ahem, me,  said that the economy wasn’t going to suffer a serious downturn in 2013 due to the sequester.  I also said in a research note that the “austere” environment of 2013 wasn’t nearly as austere as many were making it out to be.  I repeated this on the blog several times last year (see here, here and here).

Now, what was important to understand about 2013 was a few items:

  1. The actual “sequester” was practically nothing.  The government didn’t make any really substantive cuts to the budget deficit and the total government deficit actually averaged $1.2 trillion in 2013, down from $1.4 trillion in 2012.  Yes, that’s down, but when you’re running a deficit that’s 7% of GDP it’s pretty hard to call that “austere”.
  2. More importantly, much of the decline in the deficit wasn’t from cuts and “austerity”, but came from increased tax receipts.  In other words, the “austerity” wasn’t really self inflicted austerity at all.  It was due to improvement in the private sector which led to higher government tax receipts which endogenously reduced the size of the deficit.

Yes, it’s true that lots of Keynesians came out in 2012 and 2013 saying that the declining deficit would cause an economic downturn, but there were also people like myself saying that the sequester really wasn’t a big deal at all and that the “austerity” of 2013 really wasn’t “austere” at all (I even said in early 2013 that Paul Krugman was wrong to be emphasizing the degree “austerity” at work).  So the bottom line is, 2013 doesn’t prove anything about the efficacy of fiscal stimulus.  Maybe it proves that some economists let their politics cloud their forecasts.  More likely, 2013 is just further proof that all of these debates about “monetary policy” and “fiscal policy” often overlook the thing that really drives a healthy economy – THE PRIVATE SECTOR.

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