Macro Economics is Complicated!

Scattergraph- showing the correlation between austerity and
GDP growth- from Krugman's blog

Although my readers who don't share my political philosophy may find this hard to believe, I actually think a lot about how to analyze the economy in a way that's objective and which filters out my confirmation bias.  In one sense this is a futile exercise for anyone who is passionate about politics and has a strong point of view- I'm drawn to arguments that bolster my pre-existing opinions, which is a natural human modus operandi.  But I'm trying.

So one way I try to hold myself intellectually accountable is to make predictions about the future and then see if events bear them out.  I want to try to be ready to change my views if events prove me wrong.

But this game is getting really hard these days, because so much is going on.  We can hang the whole economy on President Obama, and judge "liberal" policies based on how the economy responds to his leadership.  But now we have the Sequester- a clear win for the conservative fiscal hawks.  So I've predicted some economic slowdown because of the Sequester- but from what baseline?  If the economy keeps limping along but not crashing (which is my prediction), do we blame Obama and his liberal policies, or do we blame spending cuts of 2013?  For that matter, do we blame the tax increases that kicked in during January?

 

Now if the economy goes into recession and the bottom really falls out, conservatives will of course blame the president, and liberals will of course blame the austerity policies of the Republicans.  Here I think liberals have a better case- if conservatives are going to crow that they won the latest round of the Budget Wars, which they did, then they really need to own the results.

 

But to be fair, that means that if the economy takes off and has a surprisingly strong period of growth, conservatives get to own that too.  I'll want to crow about Obama's deft handling of things, but that won't really be fair, given that I just said he "lost" the 2013 Budget Battle.

 

So barring some new twist in these wars, I guess I'm saying this: we're testing out austerity budgeting now, in 2013.  Not the severe austerity of the UK or Spain, but relative austerity compared to the policies of 2009-2012.  Keynesian economics says that should mean slowed growth; conservatives say we'll have "expansionary austerity".  Let's see who's right!