Robert Waldmann on the Fiscal Cliff and Fiscal Multipliers: Focus
I was writing a piece about the rather strange belief I hear that the failure of the U.S. economy to fall into a recession in 2013-2014 demonstrates that fiscal multipliers are relatively small. But Robert Waldmann did it first, and better than I was doing:
…of how fiscal tightening in the first quarter of 2013 (the fiscal cliff in January and Sequestration in March) was followed by decent growth in the second half of 2014…. I have two more thoughts. First… there was a contractionary fiscal shock… and a contractionary forward guidance of monetary policy shock…. No matter what one’s view of the relative effectiveness of fiscal policy and of non standard monetary policy at zero lower bound, one would expect disappointing growth… very disappointing compared to forecasts of rapid growth reducing the output gap as all past US output gaps have shrunk.
Second the lags people use are getting extremely long and variable. The debate was triggered by the surprisingly high growth in the third quarter of 2014… six quarters after…. This is very odd data analysis…
And:
…have argued that Keynesians predicted that the fiscal cliff January 2013 and sequestration March 2013 would cause a recession. A fairly large number of Keynesian economists have denied personally making that prediction…. it is fairly easy to decide if the orthodox Keynesian view was that 2013 fiscal contraction would cause a recession… [because] official… forecasting models range from new Keynesian (with added epicycles) for the Bank of England, to paleo-Keynesian for the Fed…. Official forecasts… give a hostage to fortune….
Strikingly the CBO seems to have qualitatively nailed it. The report starts:
Economic growth will remain slow this year, CBO anticipates, as gradual improvement in many of the forces that drive the economy is offset by the effects of budgetary changes that are scheduled to occur under current law. After this year, economic growth will speed up, CBO projects, causing the unemployment rate to decline and inflation and interest rates to eventually rise from their current low levels.
They didn’t predict the polar vortex, but seem to have done OK…. The CBO didn’t forecast a recession…. ‘In November 2012, the CBO specifically addressed the “fiscal cliff” here: http://www.cbo.gov/publication/43694 and predicted a very mild recession IF Congress did absolutely nothing to moderate or prevent the tax hikes and budget cuts scheduled for January 2013. Of course, we didn’t go off the cliff. Instead, we went on a moderated glide path.’…
The Fed… is a methodologically and ideologically diverse bunch… but it sure looks as if they all or almost all expected an acceleration of GDP growth from 2013 to 2014… no mention of any possible recession in 2013…. [The] Federal Bank of New York staff forecasts… “Significant fiscal drag in 2013”, showing they are Keynesian. No recession forecast…. A year later, May 2013, with funds actually sequestered, the FRBNY staff seemed not to have changed their views…. I don’t see any special challenge to the CBO New York Fed orthodoxy in the data.