Suppose you have been in freeway traffic for hours and hours going to your destination at nothing more than a crawl. To make it worse, the government decided to do roadwork at the same time making the traffic even worse. Then, finally after all that time, traffic begins to clear a bit and you begin to move a bit faster. You may even reach the speed limit before long! How would you describe the sudden acceleration back toward more normal speed? Sure, it's good news, and it feels good to finally get going at a decent speed, but it doesn't change what happened before that. And you surely wouldn't say that the government's decision to close extra lanes in a traffic jam and do roadwork somehow caused the traffic jam to end, would you?:
Happy New Year?, by Paul Krugman: There’s an alarming amount of optimism out there about US economic prospects for 2014. Let me make the situation even more alarming by saying that I basically share that optimism.
Why? Basically because of the Three Stooges effect: if you’ve been banging your head against a wall for no good reason, you’ll feel a lot better when you stop.
One way to look at the US economy in 2013 is that it was, in effect, trying to begin a strong recovery, but was held back by terrible federal fiscal policy. Housing was making a comeback, state and local austerity was, if not going into reverse, at least not getting more intense, household spending was starting to revive as debt levels came down. But the feds were raising the payroll tax, slashing spending via the sequester, and more.
Incidentally, these other factors are why I don’t take seriously the claims of market monetarists that the failure of growth to collapse in 2013 somehow showed that fiscal policy doesn’t matter. US austerity, although a really bad thing, wasn’t nearly as intense as what happened in southern Europe; it was small enough that it could be, and I’d argue was, more or less offset by other stuff over the course of a single year.
The point, in any case, is that the head-banging is about to stop...
None of this vindicates the multiple years of sluggish recovery that should have been vigorous. ...
Still, the new year starts with some good omens. ..
In a follow up post, he adds;
What A Good Year Won’t Prove: A brief addendum to my last post. If 2014 is a year of relatively good growth, you know that many people will take that as somehow refuting Keynesianism — hey, didn’t you guys predict that the economy would never recover without fiscal stimulus?In the long run, we will have a spontaneous economic recovery, even if all current policy initiatives fail. On the other hand, in the long run …
The fact that things eventually turn up is neither a refutation of Keynesian analysis, nor a reason to excuse the vast economic and human costs of bad policy to date — just as it’s not a vindication of austerity policies in the UK.