Last April I concluded that QE3 was a smart idea anyway (and should go further), and, most importantly, that a fiscal multiplier would be in effect, and we should run a larger deficit and cancel out things like the payroll tax cut while the economy is still fragile.
Recently, there’s been a wave of posts by Scott Sumner and David Beckworth calling me and others out, saying that the votes are in and it’s a victory for the market monetarists, the team that said monetary policy would offset austerity in 2013 and fiscal policy wouldn’t matter. (There have also been responses from Brad DeLong and Noah Smith.)
I don’t see it. I’m willing to be convinced, but the two clearest tests I saw the market monetarists put forward in early 2013 have resulted in failure. Let’s go through them:
1. “Paul Krugman Will Not Like These Figures,” David Beckworth, December 2, 2012, Macro and Other Market Musings
At the end of 2012, David Beckworth told the Keynesians they were wrong. In a provocative post, he argued “that nominal GDP (NGDP) growth has been remarkably stable since about mid-2010 despite a contraction in federal government expenditures” and that “the Fed has been doing a remarkable job keeping NGDP growth stable.” He posted a graph showing year-over-year NGDP growth at a steady clip.
My opinion about QE3 was addressed to Beckworth specifically, and he reiterated the same exact data graphic in his response, arguing, “The U.S. series shows a stable NGDP growth rate.”
Even though the approach of examining year-over-year NGDP growth drew criticism, I like this test because it draws a line in the sand and it also fits with my understanding of how the market monetarists view the situation. The Federal Reserve picks the NGDP path it wants, as if it was off a menu, no matter what is going on with the rest of the economy.
So how did this line in the sand turn out? Here’s the data updated through 2013, with year-over-year (Beckworth’s line) and two quarters showing:
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