tagging /u/besttrousers

First, in Keynesian models the economy’s rate of growth depends, other things equal, on the change in fiscal policy. The sequester certainly imposed fiscal tightening; but was it more or less than the fiscal tightening that took place over the previous couple of years, as the ARRA faded out and state governments continued to retrench?

I think this paragraph highlights that we need to be very careful! People can make all sorts of arguments,

• conflating levels and rates-of-change (GDP level, GDP growth rate, seasonally-adjusted GDP growth rate, seasonally-unadjusted, etc)

• slipping among Federal expenditures (or rate of change), Federal deficit (or the rate of change in the Federal deficit), cyclically-adjusted Federal deficit; or looking at the total government deficit in level, rate of change, cyclically-adjusted or not, seasonally adjusted or not.

There are a lot of variables one can sift among, and chances are that a couple will support your favorite story while a couple others won't. I'm not saying that anyone's cherrypicking, only that we need to be careful to be consistent in whatever it is we're measuring.

What we should have realized, but I didn’t – at least not fully – was that the sequester just wasn’t that big relative to the economy. The CBO put the first-year impact on the deficit at $68 billion, or 0.4 percent of GDP, in the first year with much smaller additional impacts thereafter – not trivial, but not huge either.

With a Keynesian multiplier of 2, 0.4% of GDP in sequester leads to nearly a percentage point in lower RGDP growth over one year, which is a big deal, I would think.

PK did predict that the sequester would hit the economy hard, was "intolerable" and that it was "terrible fiscal policy." He also called sequester "not potentially catastrophic" (compared to the debt-ceiling debacles), so maybe it's not as bad as the prior three links suggest.

Or maybe Krugman was engaging in some off-equilibrium threats: by making sequester seem worse than it would be, he moved the political equilibrium towards a smaller sequester, which in turn led to smaller effects on GDP growth.

At the same time, Krugman unambiguously claimed that austerity would be a "test" of monetary offset, and now that 2013 doesn't look so bad, he's qualifying that assertion. I'm not a clever man, but I think he'd be singing a different tune if sequester were exactly as it is now, but RGDP growth had been one percentage point lower.

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The timeline seems to be something like this.

Krugman in early 2013:

And the results aren’t looking good for the monetarists: despite the Fed’s fairly dramatic changes in both policy and policy announcements, austerity seems to be taking its toll.

Sorry, guys, but as a practical matter the Fed – while it should be doing more – can’t make up for contractionary fiscal policy in the face of a depressed economy.

In late 2013 / early 2014, Sumner thought the data were coming in Monetarism's favor.

Now Krugman thinks the test was poor, because sequester wasn't as bad as he originally thought.

I do think there's a bit of awkwardness here.

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Personally, I think it's quite dangerous to make bold claims using 3-4 quarters of data. GDP growth is far too noisy at that sort of interval, and at the end of the day both sides are just trying to interpret measurement error.