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."
August 27, 2010; 9:27 AM ET
Save & Share: Previous: Wonkbook: Obama against environmentalists; Katrina recovery uneven; Dems pushing broader tax cuts
Next: 'Head Start works'
Posted by: paul314 | August 27, 2010 9:58 AM | Report abuse
Posted by: lauren2010 | August 27, 2010 11:36 AM | Report abuse
Posted by: DavidMerkel | August 27, 2010 11:38 AM | Report abuse
Posted by: lauren2010 | August 27, 2010 12:07 PM | Report abuse
Posted by: eggnogfool | August 27, 2010 12:17 PM | Report abuse
Posted by: justin84 | August 27, 2010 2:02 PM | Report abuse