Saturday, January 10, 2015

20 posts on 20 points ?

I have tried and failed to resist risking wasting reader's* time with another post on the same 20 data points. I am still looking at US fiscal policy and GDP growth during the current recovery. I first looked at government purchases (G) and GDP. Commenters note that Keynesians talk about deficit spending.

One not totally pointless point is that New Keynesians talk about G minus steady state G in theory (which means G minus some sort of trend in data). The work horse NK models have Ricardian equivalence so the timing of taxes doesn't matter.

But I am a paleo Keynesian, so I should look at something else. I should look at G-cT where T is taxes minus transfers (such as pensions) and c is the marginal propensity to consume which I have estimated to be about 1/3. Note that this is not at all equal to the deficit G-T. It is true that Keynesians have used the full employment (or "structural") deficit as a fiscal policy variable, but this never made sense for any Keynesian model (including the original IS-LM dated 1937).

Being totally lazy, I look at real G + 0.5 times the Federal budget deficit divided by the GDP deflator. This means that Federal G appears 1.5 times, state and local G appear 1 time and federal taxes minus transfers appear -0.5 times. I call this variable silly.

The recovery started in 2009q2 and I look at growth rates starting then (with growth from 2009q2 to 2009q3). The correlation between the growth rate of real GDP and the growth rate of silly is 0.22 which is considerable smaller than the correlation of the growth rate of real GDP and the growth rate of real G.

Here is the scatter

The reduced correlation is mostly due to 2013q1. As the US went over the fiscal cliff (even reduced at the last minute) Federal revenues increased sharply. This was not correlated with low GDP growth (or even low growth of consumption by the way). This data point looks Ricardian -- it fits new Keynesian models better than old Keynesian models. It is one data point. Stuff happens. This is my second post about that one data point which bothers me even though it is just one data point.

*this is not a typo. I assume the reader, if any, will be singular.


Ken Houghton said...

It has always been my working assumption--since H(a) would be that economists are brain-dead idiots--that G in economic models is net of transfer payments.

If the government gives monies to bankrupt institutions so that they can pretend to be solvent for longer, does it make an impact on Domestic Product?

Robert said...

G is net of transfer payments. It is government consumption plus investment, also known as government purchases of goods and services.

The national income and product accounts were not developed by brain dead idiots* -- G is a final destination of goods and services.

Giving money does not make an automatic, by definition, contribution to GDP, whether it is to bankrupt institutions, retired people who have earned their social security pensions, or anyone else.

Such transfers do affect the deficit so they appear multiplied by 0.5 in silly while Federal Goverment purchases of goods (say bombs) or services (say my dad's work) is multiplied by 1.5.

The old Keynesian notation is the deficit is G-T where T = Ta-Tr = taxes collected minus transfers paid out.

Oh my, you are Ken. Hi how are you ? What's up ?

*note no discussion of later generations of economists including myself.

Jason Smith said...

Proof that N_readers > 1. Also, if you have a stagnating growth rate for GDP, the trend of changes in G vs changes in GDP looks even better:

You can ignore the heterodox route by which I arrived at that stagnating GDP growth rate and just assume GDP growth has been slowly falling since the 1980s to get a similar result.

mmcosker said...

Two things. One is why ignore trade deficits? In a stock flow model the budget deficit offsets trade deficits. So a 1% of GDP deficit and 1% trade deficit may be a wash. Around the 2008 crisis the budget deficit was around 1% of GDP and trade deficit 6%. Pretty unbalanced.

Two, deficit spending is not 1 for 1. Deficit spending generates tax revenue thus partially reducing the spending. For example the federal government deficit spends $100,000 in services from you, you will file a 1040 and remit a portion back to the treasury.Another person buys the bond (net financial asset is added) and their account is debited. A portion of the original reserves remains (but not the original $100K) in your account. Not sure how this distorts the G in many models.