The Prima Facie Case for Keynesianism

by Russ Roberts on November 6, 2014

in Stimulus, Uncategorized

Paul Krugman posts a chart showing the relationship between changes in government spending between 2009 and 2013 and changes in nominal GDP growth over the same time period:


Here is his description of the chart:

Instead of using changes in structural budget balance, I thought it might be useful to just look at spending. This one uses data from the IMF’s World Economic Outlook database to compare changes in total government spending (in national currencies — I didn’t correct for inflation, but that won’t matter) with changes in real GDP; I look at advanced countries, dropping the very small ones like San Mario. The picture looks like this:

And here is his conclusion:

Prima facie, cutting spending depresses economies.

As simple as that sentence appears, it’s hard to believe that’s his actual conclusion. Does he really mean that literally? There are only five countries in that chart that actually cut nominal spending. (It looks like four but one is almost on top of another.) I went to his data source. The five countries that cut nominal spending between 2009 and 2013 are Greece, Ireland, Portugal, Spain, and Taiwan. Of those five, one, Taiwan, cut nominal spending a tiny amount–less than 1% and managed to grow about 17%. Ireland cut spending about 10% but managed to grow a tiny amount but GDP didn’t shrink. Portugal and Spain each cut spending around 5% and nominal GDP fell in each country by about 2%. Greece cut spending about 30% and it’s economy shrunk about 20%.

That’s it? That’s the prima facie case that cutting spending depresses economies? Two countries cut spending and grew. Three cut spending and shrunk. And of course causation might be running in the other direction. Shrinking economies have trouble spending money especially when their credit ratings are not so healthy.

But maybe Krugman didn’t mean to make such a literal point, that cutting spending is what matters. Maybe he meant the smaller the growth in nominal spending, the smaller the growth in nominal GDP. Look at the chart. Do you see an upward sloping line there, suggesting a positive relationship between spending growth and nominal GDP? There’s a hint of one, but part of that’s because of Greece. The rest of the chart is a big mess–there’s not much of a relationship. Slovenia, for example, increased nominal spending by 18% and still managed to shrink. That’s the prima facie case for Keynesianism?

The prima facie case for Keynesianism is underwhelming.


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