Investor’s Business Daily Doesn’t Understand Fiscal Impulse

Oct 18, 2011 at 8:51 am

As Paul Krugman says when someone gets a basic–and in this case, very important–concept wrong: “oh, dear.”

This piece from the Investor’s Business Daily (“The Austerity Myth”), argues that both Krugman and I are wrong to claim that fading stimulus is a reason for our slowing economy and jobless rate stuck around 9%.  Their reasoning: based on federal spending, “there haven’t been any spending cuts at all.”

In other words, they don’t understand the fundamental concept of fiscal impulse.

For fiscal measures to boost economic growth, they’ve got to do more than they’re already doing.  It’s really just the concept of acceleration in driving a car.  To keep your foot where it is on the accelerator—even if it’s pretty far down—doesn’t add speed (or growth).  To go (grow) faster, you’ve got to press down harder.

IBD’s own graph—the one on federal spending—shows very strong fiscal impulse in 2009 over 2008, and then not much.  Or they could have looked at the figure below from the Council of Economic Advisor’s Quarterly Reports on the Recovery Act—diminished fiscal impulse (less stimulus than the previous quarter) is obvious at the end of the chart (you have to difference the cumulative values in Table 1).

Source: CEA, see text.

Or they could have looked at these two graphs, from Moody’s and Goldman Sachs, which clearly tell the story of the fiscal drag from fading stimulus (the GS chart includes the fiscal drag from state and local cutbacks, an important source these days).

This is basic stuff and it’s extremely important right now not to get it wrong.  If we mistake actual austerity for mythical austerity, we won’t even be able to identify the problem, much less do anything about it.

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