Over at the Washington Center for Equitable Growth Equitablog, I read Mike Koncal and wonder why the market monetarists are declaring that 2013 was a victory for their ideas. Were they happy with the pace of recovery in 2013? Do they think the Fed was happy with the pace of recovery and the trend of inflation in 2013?
As I have said, I used to think that under a “neutral” policy–neither unusually stimulative or contractionary–the U.S. economy would close 40% of the gap between its current position and full employment each year. I have had to give that up: now I’m down to thinking that, at least at the zero lower bound and under conditions of ultra-low inflation, it looks to be 20%. But we haven’t had that 10% gap-closing in the past year. And monetary policy has certainly not been neutral, or perhaps it would be better to say that the Federal Reserve thinks that monetary policy has been dangerously expansionary. That leaves me concluding that fiscal policy is indeed powerful: that contractionary austerity is contractionary, and austere.
So I really don’t understand why the likes of Beckworth and Sumner are declaring that the absence of a return to formal recession in 2013 increases their confidence that fiscal policy does not matter. It does not increase my confidence.