In a previous post here at Mises CA I chronicled the hole Krugman keeps digging for himself regarding the botched warnings over the so-called “sequester” in 2013. Specifically, Krugman’s latest excuse is to say that when he argued back in 2013 that the sequester was a “fiscal doomsday machine” and “one of the worst policy ideas in our nation’s history,” he actually didn’t look carefully at the numbers. In retrospect, Krugman is now claiming, the Keynesian model wouldn’t have predicted a big impact from the budget sequester, because it was small potatoes compared to the overall size of the economy.
Besides the implicit admission that Krugman is throwing out such serious accusations (“fiscal doomsday machine” etc.) without checking the numbers, is the simple fact that Krugman is wrong. Back in 2013 there were plenty of Keynesian analysts who were very well-versed with the numbers, and were confident that the sequester would slow U.S. economic growth.
A great example of this is a March 1, 2013 post from Jared Bernstein. Here’s an excerpt:
Economists, including myself, agree on guesstimates about the magnitude of the sequester’s impact–it’s expected to suck about half-a-point off of growth this year and cost 500,000-1 million jobs. That’s not recessionary but it means more slogging along of the type I bemoaned yesterday.
So how come on Larry Kudlow’s show last night it was one against four (about five minutes in) on this widely accepted point re the sequester’s impact on growth?…[U]nless you’ve got a good reason to think otherwise–and I heard nothing approach reason in the segment–you’ve got to go with the arithmetic, which in this case means subtraction of an estimated $66 billion in (calendar year!) 2013 outlays.
…Clearly, the Kudlow-crew refuses to accept this math…But here’s my question: under what micro-economics do such multipliers not exist? By which I mean, there’s a furlough, a reduced defense contract, a cancelled research grant–and I don’t think even the deniers question whether some of these cutbacks will occur–and someone has less money than they otherwise would have. So they cut back on something–a meal here, a vacation there, a movie–some discretionary part of their family budget gets pinched. And this has the well established ripple effect.
Again, I’ve never heard the folks who now scoff at Keynesian analysis of times precisely like this, with large, persistent output gaps, low inflation, and interest rates at historic lows, explain why this common sense is wrong. [Jared Bernstein, bold added.]
As the above excerpt makes clear, Krugman is completely full of it when he now claims that the sequester and subsequent growth of the U.S. economy pose no problem for the Keynesian model. Indeed, Bernstein was pointing to “the arithmetic” and wondering how the heck any self-respecting economist could doubt that the sequester would cost hundreds of thousands of jobs.
Let’s step back and look at the big picture. In early 2009, there was an (in)famous Keynesian projection saying that the Obama “fiscal stimulus” would keep unemployment below 8%, but that if the Obama plan weren’t passed, then unemployment might surpass 9%. In actual fact, the Obama stimulus was passed, and unemployment broke 10%, as this chart indicates:
Jared Bernstein was one of the lead authors of that report (the other being Christina Romer). In other words, the economy WITH the fiscal stimulus did worse than Bernstein warned would happen WITHOUT the stimulus.
Now, when it comes to 2013, we have the reverse pattern. The Keynesians (such as those at Macroeconomic Advisers) made projections of the U.S. economy with and without the sequester. You guessed it: The economy did better WITH the sequester than the Keynesians predicted would occur WITHOUT the sequester.
Thus we see that the fully-informed Keynesians, who knew what the numbers were when shooting their mouths off (unlike Krugman, according to his own statement), were wrong coming and going. When massive government deficits didn’t deliver as promised, the excuse was, “The economy was worse than we realized.”
Then, on the other end, when budget cuts didn’t harm growth as warned, the excuse was, “The economy was stronger than we realized.”
And remember folks, the Keynesians are the ones constantly running victory laps, saying the evidence overwhelmingly supports their views.
