Western Kentucky University economist David Beckworth published a challenge to the current wisdom regarding fiscal policy yesterday with a pair of charts. Both charts show that U.S. economic growth, as measured by nominal gross domestic product (NGDP, meaning the sum of all spending in the economy), has been relatively stable even as fiscal policy has contracted. The first chart shows NGDP growing at a steady 4-plus percent each year for the past few years, even as total federal government expenditures have been trending down:
And the story is the same for budget deficits: the decreasing deficits haven't affected NGDP growth:
Beckworth writes: "Both figures seriously undermine the argument for countercyclical fiscal policy and suggest a very a low fiscal multiplier."
Instead, Beckworth suggests, the Federal Reserve's monetary policy is the dominant force in influencing the macroeconomy. He even argues that the fiscal cliff, the $600 billion per year fiscal contraction slated to go into force next year if Congress doesn't act to avoid it, won't depress demand if the Fed acts to offset it with monetary stimulus.
Beckworth's bird's-eye view of the lack of a relationship between government spending and deficits and demand growth is meant to provoke those, like Paul Krugman, who advocate fiscal stimulus. The motivation for fiscal stimulus is to boost aggregate demand, but Beckworth's charts show that, at least at first glance, fiscal contraction hasn't led to declines in aggregate demand over the past few years.