Wednesday, November 26, 2014

Sequester, growth, and the deflation that did not bark.

Multiplier? What multiplier? 
Wall Street Journal, November 26 2014:
The economy expanded at its fastest pace in more than a decade during the spring and summer,... Gross domestic product...grew at a seasonally adjusted annual rate of 3.9% in the third quarter... combined growth rate in the second and third quarters at 4.25%, affirming the best six-month pace since the second half of 2003." 
The upward revision to overall growth, driven by [sic] stronger consumer and business spending and a smaller drag from inventory investment, surprised economists... 
Paul Krugman, February 22 2013, "Sequester of Fools"
The sequester, by contrast, will probably cost “only” around 700,000 jobs.
New York Times, Februrary 21 2013, "Why Taxes Have to Go Up"
Democrats and Republicans remain at odds on how to avoid a round of budget cuts so deep and arbitrary that to allow them now could push the economy back into recession. The cuts, known as a sequester, will kick in March 1 [my emphasis]

Paul Krugman, March 10, 2013: "Sequester Cuts Will Be Felt in Time" will start to build, and it won't just be White House tours, it will be air traffic delays, the effects kick in, it will remind people why we actually need a government that does its job.
(Actually,  manifest failures of government to do its job lately are pretty depressing. But not for lack of money.)

Meanwhile back in the worryzone

Deflationary Vortex?
Paul Krugman Sept 4 2014 "The Deflation Caucus"
Europe, which is doing worse than it did in the 1930s, is clearly in the grip of a deflationary vortex,
Really, "worse than the 1930s???" We're watching different versions of the History Channel.

Paul Krugman, undated,
... if the economy ... has excess capacity, and also ...i = 0 ...- it cannot get out. The output gap feeds expectations of deflation, and since the nominal interest rate cannot fall this implies a rising real interest rate, worsening the output gap. The economy, in short, falls into a deflationary spiral.
This prediction of a "deflation spiral" once we hit the zero bound with huge "output gaps" has to stand as a stark failure of Keynesian economics, on a par with its grand failure to predict inflation in the 1970s. Only, predicting a catastrophe that did not happen doesn't attract quite as much attention as failing to predict one that did.

If you're not getting the point, look at the graph. Let me remind you "deflation" means numbers less than zero, a lot less than zero. And "spiral" or "vortex" means getting steadily more negative, not asymptoting to zero. And if you patch a model ex-post and ad-hoc not to produce a spiral, then that model no longer predicts that inflation is a danger.

To be sure, I am being inconsistent today -- I have staunchly maintained that "models" must exist on paper or in computers, in objectively verifiable forms, with "predictions" that any operator can make, not in soothsayer's heads.  I have staunchly maintained that evaluating economic theories by pundit prognostication is completely meaningless.

But I also don't make it my business to vilify other people from misquoted opinions on current dangers. (Though I'm indeed pulling Paul's leg a bit, please notice the absence of "evil," "vile," "mendacious idiot," "corrupt," "stupid," "doesn't know economics," and so on from this post.)

So just this once I will give in to grumpy temptation.