Friday, June 26, 2015

Always look at the data (Keynesian economics edition)

Scott Sumner says that we had a half a trillion dollars in deficit reduction from 2012 to 2013:
At the time, I was under the misapprehension that many Keynesians thought a massive and sudden reduction in the federal budget deficit would constitute “austerity” and hence would slow growth. Now that the dust has settled, we can calmly look at the data
Calendar 2012: Budget deficit = $1061 billion 
Calendar 2013: Budget deficit = $561 billion 
A reduction of $500 billion in one year. I used to be under the impression that Keynesians thought this would be a disastrous policy that sharply slowed growth.
It's true! That's a huge amount of deficit reduction all at one time. It's sharply visible on this graph of Federal receipts and expenditures:

It's nearly as big as the ARRA -- almost a 20% rise in Federal receipts. It definitely should give Keynesians pause. Or at least a reason to dig into the data ... I mean how do you get nearly a 20% rise in Federal receipts with the economy essentially giving a collective "meh" ... ? Monetary offset is one way. However, it turns out it is nearly entirely due to a single source: dividends from Fannie Mae and Freddie Mac [pdf from BEA]:

That accounts for over half of the deficit reduction between 2012 and 2013. You can see things in perspective if we subtract this piece from the graph above (the old receipts line in gray now):

The other half primarily comes from (from the BEA [pdf]):
Contributions for government social insurance accelerated as the result of an acceleration in social security contributions that reflected the expiration of the “payroll tax holiday” at the end of 2012 and to a lesser extent, the introduction of a hospital insurance tax surcharge of 0.9 percent for certain taxpayers.
Without those two pieces, there would be effectively zero deficit reduction -- there don't seem to have been any significant spending cuts, only a tax increase. And the tax side has a lower multiplier than the spending side (see e.g. here [pdf]) in the typical Keynesian analysis.

The Keynesian effect of the so-called "austerity" in 2013 would have been relatively small (this is just the deficit reduction divided by NGDP compared with NGDP growth):

It would have been completely lost in the noise.



Sumner responds.


  1. Jason, nice digging. I don't see "Freddie Mac" mentioned in your BEA document link: only Fanny Mae. So it appears that Federal income on assets spiked in two non-adjacent 6 month reporting periods (your 2nd FRED chart)? Why exactly does it look like that? Is it because the Federal government purchased Fanny & Freddie assets as part of their bail out? ... but how exactly do you explain that strange shape for the dividend curve? Why did it go back down between the two spikes, and why are there two spikes? A sell off of those assets? Thanks.

    1. The budget doesn't distinguish between the two, but here is Yglesias reporting about the dividends:

      The strange shape of the dividend curve represents the fact that dividends aren't paid out continuously, but on a schedule (annually).

  2. O/T: I saw this scatter diagram + regression and thought of your previous criticisms of Sadowski's plots, and I wonder if you have any comment about this.

    Also, what do you think of this John Cochrane post.

    1. I haven't read Cochrane's post yet, but the twitter link includes G20 countries so several, like Argentina, aren't constrained the ZLB. So it's similarly meaningless ... like Sadowski's graph.

    2. ... maybe he needs a "smackdown" Lol. (c:

  3. Austerity is not yet well defined, is it? The government deficit is a crude indicator, and is far from the whole story. The suicide rate is another crude indicator, as it approximately doubles for the long term unemployed. Government spending minus tax revenues would, I suppose, eliminate the dividend payments. Subtracting interest payments from government spending might be a good idea. But then making cyclical corrections defeats the whole idea of austerity, doesn't it? Yet the cyclically adjusted data was what Sadowski used in his recently reported research. (!)

    I suppose what we are seeing is people with different views attempting to define austerity so that the data support their side. Sumner's approach is interesting, in that he takes indicators that he claims are used by those whom he calls Keynesians -- or at least, that he says that he thought that they used. Whether this is an attempt to avoid bias or is a rhetorical ploy is another question. It would not surprise me if some anti-austerians are shooting themselves in the foot.

    1. You're right that the deficit is a crude measure. However I think austerity is fairly well defined though ... just not reported well on easily accessible data sources like e.g. FRED.

      Looking at deficit reduction alone ignores:

      - asset income (above) and seigniorage
      - increases in tax receipts due to an improving economy
      - increases in import tax receipts from increasing imports
      - reductions in unemployment insurance payments due to an improving economy
      - &c
      - ...

      It also misses more subtle effects like the deficit getting worse (or just failing to get better) because you raised taxes, hurting the economy.

      Overall, austerity is increasing tax rates on people and businesses (e.g. increasing the payroll tax above) and decreasing government spending rates (e.g. reducing the number of weeks you can claim unemployment, or the pay outs per person).

    2. I think that timing is an important aspect of austerity. It needs to occur in hard times. Forgoing a second dessert is not austerity, going to bed hungry is.

  4. Yes, very good point. As a rule of thumb, a decent analyst should always drill down into data one level of granularity below what they think they require. The extra level gives clues to the CAUSE of a change in higher level summary statistics. The cause is essential to figuring out an appropriate response. This is why individual businesses place so much value in databases which allow them to drill down to transaction level detail. Even at the level of a single business, a drop in sales could have a hundred different causes each with a separate response.

    A related point. I note that many economists are now posting about secular stagnation. The economists appear to assume that the lack of growth in GDP implies that businesses are not innovating. This is a similar type of error to the one you point out. Economists are assuming that innovation will always show up in standard economic statistics. However, that is wrong.

    We can now order groceries over the internet. In the UK, at least, some supermarkets deliver these orders at no extra cost to the customer. This innovation does not cause the customer to buy more groceries. Neither does it make much difference to the supermarket’s costs or profits. The benefit of this innovation is that the customer saves time which can then be put to higher quality uses such as playing with the kids or writing about information transfer economics. This benefit is real. The innovation adds value to customers. However, it is invisible to economists looking at cost / spending based statistics. As the innovation is invisible to economists, they conclude that it doesn’t exist.

    Supermarkets also make innovations in terms of the quality and healthiness of their food. Again, these innovations won’t necessarily result in increased sales so won’t appear in standard economic statistics. If they appear anywhere, it will be in health statistics.

    I suspect that this is one of the reasons why mature economies slow down when measured by GDP growth. At some stage, innovation moves from focusing on producing more things to producing better quality and more convenient things for the same price; offering improved service levels for the same price; and producing the same things with less waste and, as a result, lower price.

    1. Cheers, Jamie.

      I'd agree -- these hedonic adjustments made to e.g. the price level to account for these kinds of things seem to be more about ethical philosophy than the basic mechanics of economics ...

  5. Replies
    1. Thanks for the heads up. I responded ...

  6. Question Jason. To me the austerity of 2013 discussion can get muddled.

    For instance, Sumner mentions the tax hikes but regarding the hikes than came from the Bush tax cuts expiring for top 2 brackets, no Keynesian model that I'm aware of would predict it would be harmful.

    Then there was the sequester. That was what most Keynesians were criticizing. Also when you talk about warnings about 2013 austerity it's important to qualify whether or not this was before or after the fiscal cliff.

    If we had truly gone over the FC in 2013-all the Bush tax cuts expiring then it certainly would have been major pain to the economy.

    How would you assess the effect of the sequester?

    1. I agree -- the tax cuts for wealthy people or (tax hikes) have a much smaller multiplier than other kinds of stimulus.

      Regarding the sequester, there are all kinds of issues of how cuts are allocated and recorded -- making the actual cuts much smaller than the headline numbers and pushing them out over the future. When all is said and done, it appears there is a big shock that could be attributed to the sequester/fiscal cliff in 2014 Q1 ...

      More here:

  7. Overall my attitude is this. Even if GDP did increase how do we know that without austerity would GDP wouldn't have been higher still?

    Sumner seems to be assuming you either have zero offset or 100%. Maybe it was say 65% or 35%.

    There are degrees. This is my trouble with him making these categorical claims. With such noisy data such heavy weather shouldn't be possible.

    1. Yes, that seems to be it. Keynesian multipliers aren't all zero or all 1.5 ...

  8. Interesting post. Of course, the Fed has been transferring money to the Treasury as well.

  9. No, I don't understand your created value argument...the government getting a good deal doesn't erase the fact that the dividends potentially came from people paying back their loans right? The money still leaves the circular flow...we aren't arguing here over whether or not Freddie Mac should exist...we might be arguing over whether they should pay dividends...but if the money leaves the system...that's negative spending

    1. Hi LAL,

      I think this is an interesting take -- the contractionary effect is the opportunity cost of issuing additional "safe assets" (government debt) in the shortage of safe assets view of the liquidity trap. I wrote some more about this, referencing your comment here:

  10. This comment has been removed by the author.

    1. I at least have a large enough sample size to confidently announce that there is some relationship between pressing "back arrow" on my phone and double posting...the exact causal relationship (if any) remains unclear...

    2. Blogger has all kinds of weird stuff that happens. In firefox on one of my computers I can't comment anymore for some reason.

  11. What is your argument for excluding the GSE net worth sweeps from austerity? If you regard the GSEs as de facto government entities, then increased profits without compensating expenditures represents a rise in government savings. If the "sponsored" is still meaningful, then those funds represent arbitrary, institution specific taxes.


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