This first figure shows that aggregate demand growth has not been affected by a tightening of fiscal policy since 2010. Specifically, it shows that nominal GDP (NGDP) growth has been remarkably stable since about mid-2010 despite a contraction in federal government expenditures.Those sentences are from prominent Market Monetarist and NGDP Targeting proponent David Beckworth. His conclusion based on the above graph and a similar one depicting the declining budget deficit is that:
Both figures seriously undermine the argument for coutercyclical fiscal policy and suggest a very a low fiscal multiplier. They also indicate that the Fed has been doing a remarkable job keeping NGDP growth stable around 4.5%. Monetary policy, in other words, appears to be dominating fiscal policy in terms of stabilizing aggregate demand growth.Trying to find support for Beckworth’s claim, I thought a brief look at how changes in the money supply over the past couple years compare with NGDP might do the trick. Here’s what I found:
The above chart shows that NGDP has been largely unaffected by both severe tightening and expansion of monetary policy since 2010. Looking at M2 versus NGDP growth displays a similar story:
Both charts suggest that changes in the money supply have little impact on NGDP growth. Given that percent changes in either money supply measure are far greater than those of recent fiscal policy, one might conclude that monetary policy has a smaller multiplier than fiscal policy.
Based on the above charts, which conclusion should we accept? Or are both fiscal and monetary policy ineffective? The reality is that all of these charts tell us very little about the causation between either fiscal or monetary policy and NGDP. Noah Smith says it best:
Beckworth's conclusion is not necessarily valid, and illustrates the danger in drawing conclusions about structural variables from looking at correlations between macroeconomic aggregates. Here's why the conclusion might not be valid:
Suppose that Keynesian demand management policy works perfectly: in other words, fiscal stimulus perfectly smooths fluctuations in aggregate demand. In that case, you will observe substantial swings in fiscal policy, but no swings whatsoever in aggregate demand. When external shocks push AD up, fiscal tightening will push it back down; when external shocks push AD down, fiscal policy will push it back up.
To conclude: The graphs Beckworth shows are perfectly consistent with a large fiscal multiplier. In fact, they are perfectly consistent with the hypothesis that monetary policy is essentially ineffective, that the Fed is basically powerless, and that fiscal policy is capable of doing a perfect job of smoothing NGDP growth all on its own.Smith’s conclusion similarly applies to the charts depicting Monetarist demand management policy. The point is that these graphs can be subjectively interpreted to support fiscal policy, monetary policy, or neither. These charts may appease proponents of the respective camps, but far more and better empirical data will be necessary to actually change any minds.
Update: A reader asks for a chart depicting M1 versus NGDP during this period. Always trying to oblige my readers' requests:
If monetary policy affects NGDP, this chart doesn’t reflect it.