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Should you believe the CBO when it says the stimulus reduced unemployment?

By Justin Fox

On Wednesday, Dylan Matthews cited the Congressional Budget Office's estimate of how much lower the unemployment rate is than it would have been without the American Recovery and Reinvestment Act of 2009 (a.k.a. the stimulus package, and I approvingly linked to his post. That led Reihan Salam to start bugging me on the Twitter and elsewhere about what exactly the CBO estimate -- that the stimulus boosted GDP by between 1.7 and 4.5 percentage points, and reduced the unemployment rate by between 0.7 and 1.8 percentage points -- means.

Here you go, Reihan: All the CBO estimate means is that, according to the CBO's model of how stimulus affects economic growth and unemployment, a stimulus that big ought to have had an impact that big. In other words, the CBO is not telling us what happened but what it thinks should have happened. In March somebody asked CBO director Douglas Elmendorf after a speech:

If the stimulus bill did not do what it was originally forecast to do, then that would not have been detected by the subsequent analysis, right?

Elmendorf's disarmingly straightforward response was "That's right. That's right." He reiterated that point in his Director's Blog on Tuesday:

Although CBO has examined data on output and employment during the period since ARRA’s enactment, those data are not as helpful in determining ARRA’s economic effects as might be supposed because isolating the effects would require knowing what path the economy would have taken in the absence of the law. Because that path cannot be observed, the new data add only limited information about ARRA’s impact.

The same thing is true, of course, of others' assessments that the stimulus hasn't worked. There was an especially maddening opinion piece in the Wall Street Journal last year in which John Taylor and a couple of colleagues claimed that incoming data showed the stimulus to be a failure. Once you began reading, though, it quickly became clear that the incoming data didn't prove anything at all and that Taylor & Co.'s failure verdict was the product instead of "our research with modern macroeconomic models."

So ... we just can't know for sure what would have happened without the stimulus, meaning that we can't know for sure how much impact it has had. We can certainly make educated guesses. Some make these guesses using Keynesian economic models, some use "modern" ones (which actually rely on pre-Keynesian assumptions about economic behavior). I don't think either of these techniques is markedly better (and in some ways they're worse, because of the false precision of the numbers they deliver) than just comparing the economy's current trajectory with what happened during the Great Depression or in countries like Iceland and Ireland that couldn't get away with running big, stimulating deficits in the wake of the financial crisis. My guess is that the stimulus -- not just ARRA but the bailouts and the Fed's monetary stimulus and the automatic stimulus that happens in a downturn when tax revenue plummets and government spending does not -- saved a bunch of jobs. But I'm certainly not going to volunteer a number.

Justin Fox is editorial director of the Harvard Business Review Group and author of "The Myth of the Rational Market."

By Justin Fox  |  August 27, 2010; 9:27 AM ET
 
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Comments

Are you willing to put some bounds on the number? Greater than zero? Greater than a million? It's pretty easy to start with the jobs that we know would have been lost or left uncreated, because we know where stimulus and other money went. And unless you're a "crowding-out" fan, it's a pretty good assumption that the actual trajectory of private-sector job creation represents an upper bound on the no-stimulus case.

Posted by: paul314 | August 27, 2010 9:58 AM | Report abuse

Many governors, including republican, were quoted in local news articles across the country that the stimulus money they received saved or created tens of thousands, and even 100,000s jobs in their states.

A little googling can prove it.

Posted by: lauren2010 | August 27, 2010 11:36 AM | Report abuse

One tough thing about economics -- we never get to do multiple trials of the exact same event, so most analyses are merely gussied up opinions, even mine.

What is amazing is that we honor the opinions of economists so much, when their theories were a major part of creating this crisis. Should we think they can get us out? No.

Posted by: DavidMerkel | August 27, 2010 11:38 AM | Report abuse

Politicians and economists who were proponents of supply-side theories were the ones who caused the current mess. Not all economists and not all politicians favored the policies of Ronald Reagan and George Bush. We run a 640 billion trade deficit and that is because we have hurt our manufacturing ability and reduced tariffs though China, India, Japan and SK did not. Jack Welch is not an economist, but he BRAGS about being the one who invented outsourcing.

In sum, it wasn't economists or hispanics or gays or liberals who destroyed our economy and our manufacturing base. It was rich white conservatives who pursued unfettered free-trade and who gave transnational and big US corporations the status of personhood though they have loyalty only to higher profits and not to the American people.

Posted by: lauren2010 | August 27, 2010 12:07 PM | Report abuse

Yeah, I remember that WSJ article.

May have been the single worst piece of economic analysis ever written. Which by WSJ I can only assume meant promotions were in order.

Posted by: eggnogfool | August 27, 2010 12:17 PM | Report abuse

"Many governors, including republican, were quoted in local news articles across the country that the stimulus money they received saved or created tens of thousands, and even 100,000s jobs in their states.

A little googling can prove it."

There is no need to doubt that sending more funds to state governments will lead to increased employment by the state.

Were all the wealth of Los Angeles County appropriated and transferred to the state of Illinois, Illinois could indeed point to thousands of jobs which would have not existed without that funding.

With the source of funds so concentrated, we would see with clarity how the fortune of Illinois is not a free lunch.

When stimulus funds are provided from all across the world, the effect of transfering the funds is far too diffuse to see.

Every borrower requires a lender. We can easily see what the borrower does with the borrowed funds, but it is far less clear what the lender would have done if she had not made the loan in the first place.

Posted by: justin84 | August 27, 2010 2:02 PM | Report abuse

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