Last week (March 28, 2013), the – US Bureau of Economic Analysis – released the – revised (third estimate) – fourth-quarter 2012 US National Accounts data, which showed that real GDP grew by 0.4 per cent in the December quarter and 1.7 per cent for the 12 months to December 2012. The estimates were revised upwards from a quarterly growth rate of 0.1 per cent, largely due to higher estimated consumption and investment growth. In the six years to the December-quarter 2007 (the most recent real GDP peak) the average quarterly growth rate was 0.62 per cent. The US economy is still labouring with a huge cyclical output gap. That doesn’t stop a range of commentators from arguing otherwise. Other than the hysterical (and inaccurate) – David Stockman blast – there was a somewhat more measured article by Jeffrey Sachs in the New York Times (March 31, 2013) – On the Economy, Think Long-Term – which claims that the US problem is not cyclical but structural. For non-economists, that means that the policy solutions are quite different. In the absence of hysteresis, fiscal and monetary policy cannot solve a structural problem. The only problem with Professor Shock Therapy’s hypothesis is that it doesn’t stack up with the evidence. The evidence does not support the assertion that job polarisation in the US is constraining economic growth. The evidence continues, unequivocally, to support the view that the US economy is suffering from a major cyclical downturn (output gap) and needs a carefully targetted, aggregate demand stimulus.

It is a busy day today with meetings in one capital city, then a presentation a bit later in the day in another city – so time is short. Over the weekend, I watched an episode of the recent Ken Burns’ documentary – The Dust Bowl – which traces the events surrounding the drought during the Great Depression in the so-called – Dust Bowl – of the United States. It is worth watching if only for the stark reminder of how the main body of my profession is so deluded. I should add that as a strict vegetarian the title of my blog is rather offensive but it is faithful to history and that has value in itself. While the neo-liberal historical revisionist teams relentlessly attempt to airbrush all fact out of the Great Depression the inescapable truth is that thousands of American adults and their children would have died during the Dust Bowl crisis had not the American government intervened with food parcels and then major public sector job creation schemes such as the Civilian Conservation Corps (CCC) and later the Works Progress Administration (WPA). Government fiscal stimulus saved America. No “chickens” were put in “pots” by the “market” during that time. Rather it was the government that fed and clothed the people. Nothing has changed since.

This blog extends the discussion in yesterday’s blog – Exploring pro-cyclical budget positions – which is why I am running them on consecutive days. Not that I think any of my readers (Austrian schoolers and other conservatives aside) have memory issues! The discussion that follows focuses on ways in which we can interpret the fiscal stance of a government and hopefully clears up some of the confusion that I read in E-mails I receive from readers. I say that not to put anyone down but rather to recognise that the decompositions of budget outcomes and analysing the direction of fiscal policy on a period-to-period basis is not something that the financial press usually focuses on. In avoid detailed analysis, the press leaves lots of misperceptions unchallenged and often the wrong conclusions are drawn. I am not talking about policy preferences here. Just coming to terms with the facts is sometimes difficult for many commentators to achieve. But, of-course, the “facts” are also sometimes difficult to discover given that the methods used to produce them are often ideologically biased (I am talking here about the decomposition of the actual deficit into structural and cyclical components requires a full employment benchmark, which is where the fun starts.

There has been a bit of fun in the last week, with the IMF accusing our previous conservative government (10 increasing surpluses out of 11 years in power – 1996-2007) of being the only period of profligate fiscal policy over the last 50 years. That is hysterical really because the government in question held themselves out as the exemplars of fiscal prudence and responsibility. They were, in fact, one of the most irresponsible managers of macroeconomic policy in our history, but not for the reasons that the IMF would identify. All this shows how far fetched the research that the IMF is spending millions of public dollars (donated by member governments) has become. One week they are admitting how wrong their forecasts are with millions losing their jobs as a result and the next week they are handing out medals for fiscal prudence and backhanders for wasteful spending. I was going to analyse the underlying IMF paper today because it is illustrative of why the IMF keeps making these fundamental errors. But I was sidetracked and got lost in some data and some other things. So the IMF tomorrow (maybe) and today a little walk through some trends which confirm why the IMF has a problem recruiting good economists. It all starts with their miseducation in our universities. The point is a casual look at the data shows that the mainstream of my profession hasn’t been even remotely correct in its statements over the last 4-5 years.

Being a researcher is interesting and frustrating. But it almost always takes one on a ride that is unpredictable, which is part of the fun. Sometimes, you hit a dead-end (often = frustrating). Other times, you end up somewhere that you never planned but which is instructive in itself (= interesting). Yesterday, my blog was about financial market criminals that seem to escape prosecution. The insulation from prosecution of white collar criminals is not confined to the financial markets. Today, the basic message is that if a nation engenders growth the budget deficit will likely fall and the benefits of the growth will be higher employment, higher national income and improved material living standards. The opposite is the case when a nation contracts. The irony is that the nation will still probably have a budget deficit, but in this case it will be accompanied by stagnation. The first deficit is good and virtuous the second bad and irresponsible (from the perspective of the government fiscal policy stance). So even if you are obsessed with reducing deficits, the best way is to engender growth. The dumbest thing a government can do if it wants a lower deficit is to impose fiscal austerity. There are a lot of dumb governments out there. The problem is they are aided and abetted by criminal types who know full well it is dumb to cut net public spending but pressure governments to do so as long as the space for spending on them expands.