A Confession from the CBO Director
The Congressional Budget Office recently estimated that the so-called stimulus generated jobs and growth. I addressed some of the profound shortcomings in CBO’s Keynesian model in a previous post, pointing out that the model is structured to produce certain results regardless of what happens in the real world.
Interestingly, the Director of the CBO, Doug Elmendorf, basically agrees with me. In a recent speech, recorded by C-SPAN, he was asked during the question-and-answer session whether the model simply spits out pre-determined numbers. After some hemming and hawing and a follow-up question, he confessed “that’s right” when asked if the model would be unable to detect whether the stimulus failed. The relevant exchange begins around the he 39-minute mark of this recording, and Elmendorf’s confession takes place shortly after the 40-minute mark (I selflessly watched the entire thing so you wouldn’t have to suffer waiting for the key moment).
I’m not sure whether this admission is good news or bad news. It is a sign of progress, I suppose, that CBO’s Director is now on the record acknowledging that the model is useless (at least for purposes of measuring the effectiveness of more government spending). But it is perhaps an even more troubling indication of what’s wrong in Washington that nobody is concluding that the time has come to junk Keynesian analysis. This is either an updated version of The Emperor’s New Clothes or a perverse form of the joke about the drunk looking for his keys under the streetlight because there’s light, even though he lost them someplace else.
Filed under: General; Government and Politics; Tax and Budget Policy
Keynesian Economics and the Wizard of Oz
When Dorothy and her friends finally reach Oz, they present themselves to the almighty Wizard, only to eventually discover that he is just an illusion maintained by a charlatan hiding behind a curtain. This seems eerily akin to to the state of Keynesian economics. It does not matter that Keynesianism isn’t working for Obama. It does not matter that it didn’t work for Bush, or for Japan in the 1990s, or for Hoover and Roosevelt in the 1930s. In the ultimate triumph of theory over reality, the Keynesians say all that matters is the macroeconomic model behind the curtain showing that more government spending leads to more jobs and growth. Consider the recent report from the Congressional Budget Office (CBO), which claimed that Obama’s stimulus created at least one million jobs. As Brian Riedl of the Heritage Foundation noted:
CBO’s calculations are not based on actually observing the economy’s recent performance. Rather, they used an economic model that was programmed to assume that stimulus spending automatically creates jobs — thus guaranteeing their result. …The problem here is obvious. Once CBO decided to assume that every dollar of government spending increased GDP…, its conclusion that the stimulus saved jobs was pre-ordained.
But surely this can’t be true, you may be thinking. Our public servants in Washington would not make important policy decisions based on a model that automatically produces a certain result, would they? Peter Suderman of Reason pulls aside the curtain:
[T]hose reports rely on assumption-packed models that effectively predetermine their outcomes; what they say, in essence, is that the stimulus worked because we assume it did. …That’s especially true when estimating government spending’s productive effects, which is accomplished by plugging numbers into a formula that assumes that government spending produces a multiplier—an increased return for every government dollar spent. In other words, it extrapolates from how much money is put in rather than from what has actually come out. And it does so using a formula that dictates that if money is put in, even more money will come out. According to the CBO’s estimates, depending on how the money is spent, one dollar of government spending can produce total economic activity of up to $2.50. What a deal! …[F]or all practical purposes, the same multipliers that were used to predict how many jobs would be created are being used to estimate how many jobs have been created.
Interestingly, CBO’s analysis is completely schizophrenic. Its short-run budget numbers are based on free-lunch Keynesianism that assumes deficit-financed government spending boosts growth, while its long-run numbers are driven by an assumption that government borrowing is terrible for growth (which is why CBO actually claims higher taxes boost economic output — see, for example, Figure 3 of this CBO analysis). It is impossible to know whether the people at CBO actually believe their own work, or whether they are simply trying to please their political paymasters by producing results that (conveniently) match up with political preferences for more spending today and higher taxes tomorrow. You can draw your own conclusions, but keep in mind that CBO is now making the absurd claim that a giant new healthcare entitlement will reduce budget deficits.
Filed under: Government and Politics; Political Philosophy; Tax and Budget Policy
Tuesday Links
- Obama’s budget and the $1 trillion mistake.
- Justin Logan on the rise of government and central control: “The factor that explains the largest share of the centralism and growth of the American state is war.“
- What we can learn from Hugo Chavez: “The lesson for all of us, north and south of the border, is watch our presidents closely, and check them when they try to slip their constitutional bonds.”
- “Stimulus Means More Meddling in Education” featuring Adam B. Schaeffer.
Making Government Bigger Is Not Stimulus – and It Won’t Create Jobs
This new video from the Center for Freedom and Prosperity explains how last year’s so-called stimulus was a flop – and also reveals why politicians are pushing for another big-government spending bill.
Interestingly, since last year’s stimulus was such a disaster, the redistributionists in Washington are calling their new proposal a “jobs bill.” But as I say in the video, this is akin to putting perfume on a hog.
For further background, here is a video explaining why Keynesian economics is wrong and another predicting (in advance!) that last year’s stimulus would be a mistake. And just in case anyone actually wants the economy to grow faster, here’s one about policies that actually increase prosperity.
Filed under: Government and Politics; Political Philosophy; Tax and Budget Policy
Is Keynesian Stimulus Working?
In his Brookings Institution speech yesterday, President Obama called for more Keynesian-style spending stimulus for the economy, including increased investment on government projects and expanded subsidy payments to the unemployed and state governments. The package might cost $150 billion or more.
The president said that we’ve had to “spend our way out of this recession.” We’ve certainly had massive spending, but it doesn’t seem to have helped the economy, as the 10 percent unemployment rate attests to.
It’s not just that the Obama “stimulus” package from February has apparently failed. The total Keynesian stimulus is not measured by the spending in that bill only, but by the total size of federal government deficits.
The chart shows that while the federal deficit (the total ”stimulus” amount) has skyrocketed over the last three years, the unemployment rate has more than doubled. (The unemployment rate is the fiscal year average. Two months are included for FY2010.)
The total Keynesian stimulus of recent years has included the Bush stimulus bill in early 2008, TARP, large increases in regular appropriations, soaring entitlement spending, the Obama stimulus package from February, rising unemployment benefits, and falling revenues, which are “automatic stabilizers” according to Keynesian theory.
The deficit-fueled Keynesian approach to recovery is not working. The time is long overdue for the Democrats in Congress and advisers in the White House to reconsider their Keynesian beliefs and to start entertaining some market-oriented policies to get the economy moving again.
Spending Our Way Into More Debt
Huge deficit spending, a supposed stimulus bill, and financial bailouts by the Bush administration failed to stave off a deep recession. President Obama continued his predecessor’s policies with an even bigger stimulus, which helped push the deficit over the unimaginable trillion dollar mark. Prosperity hasn’t returned, but the president is persistent in his interventionist beliefs. In his speech yesterday, he told the country that we must “spend our way out of this recession.”
While a dedicated segment of the intelligentsia continues to believe in simplistic Kindergarten Keynesianism, average Americans are increasingly leery. Businesses and entrepreneurs are hesitant to invest and hire because of the uncertainty surrounding the President’s agenda for higher taxes, higher energy costs, health care mandates, and greater regulation. The economy will eventually recover despite the government’s intervention, but as the debt mounts, today’s profligacy will more likely do long-term damage to the nation’s prosperity.
Some leaders in Congress want a new round of stimulus spending of $150 billion or more. The following are some of the ways that money might be spent from the president’s speech:
- Extend unemployment insurance. When you subsidize something you get more it, so increasing unemployment benefits will push up the unemployment rate, as Alan Reynolds notes.”
- More infrastructure spending. This will lead to misallocation of resources since only markets can allocate resources efficiently. Governments allocate capital on the basis of politics instead of economics.
- “Cash for Caulkers.” This would be like Cash for Clunkers except people would get tax credits to make their homes more energy efficient. Any program modeled off “the dumbest government program ever” should be put back on the shelf.
- More Small Business Administration lending. A little noticed SBA program created by the stimulus bill offered banks an “unprecedented” 100 percent guarantee on loans to small businesses. The program has an anticipated default rate of 60 percent. Small businesses need lower taxes and fewer regulations, not a government program that perpetuates more moral hazard.
- More aid to state and local governments. State and local government should be using the recession to implement reforms that will prevent them from going on another unsustainable spending spree when the economy recovers. Also, we need fewer state and local government employees – not more – as they’re becoming an increasing burden on taxpayers.
The president said his administration was “forced to take those steps largely without the help of an opposition party which, unfortunately, after having presided over the decision-making that led to the crisis, decided to hand it to others to solve.” Mr. President, nobody has forced you to do anything. You’ve chosen to embrace – and expand upon – the big spending policies that were a hallmark of your predecessor’s administration.
CBO, the Wizard of Oz, and the Keynesian Fairy Tale
The Obama Administration said that the so-called stimulus was necessary so that the unemployment rate would not rise above 8 percent. Indeed, the White House warned that the joblessness rate would climb to 9 percent if lawmakers did not approve the $787 billion package. Critics responded by explaining that making government bigger would divert resources from the productive sector of the economy and hurt growth. These skeptics also noted that nations using “Keynesian” policy, such as the United States in the 1930s and Japan in the 1990s, did not generate good results. And since the unemployment rate is now above 10 percent, it certainly seems like opponents were correct.
But now the supposedly non-partisan Congressional Budget Office has jumped to the defense of the White House, estimating that the spending bill actually generated beween 600,000 and 1.6 million jobs. How can that be, you may ask, when the number of jobs has fallen by more than 3 million? The CBO neatly sidesteps that real-world concern by moving the goalposts, using a slightly more sophisticated version of Obama’s “jobs created or saved” alchemy. Their jobs-created estimate is compared to a make-believe baseline of how many jobs there would be “without the law.”
CBO estimates that in the third quarter of calendar year 2009, an additional 600,000 to 1.6 million people were employed in the United States, and real (inflation-adjusted) gross domestic product (GDP) was 1.2 percent to 3.2 percent higher, than would have been the case in the absence of ARRA. …CBO’s current estimates differ only slightly from those CBO prepared in March 2009. At that time, CBO projected that in the third quarter of 2009, U.S. employment would be higher by 600,000 to 1.5 million people with ARRA than it would be without the law, and real GDP would be 1.1 percent to 3.0 percent higher. CBO’s new estimates reflect small revisions to earlier projections of the timing and magnitude of changes to spending and revenues under ARRA. …Economic output and employment in the spring and summer of 2009 were lower than CBO had projected at the beginning of the year. But in CBO’s judgment, that outcome reflects greater-than-projected weakness in the underlying economy rather than lower-than-expected effects of ARRA.
Needless to say, this means there is no objective benchmark. The unemployment rate could jump to 15 percent and total job losses could reach 10 million, but CBO would continue to say, for all intents and purposes, that the results from their Keynesian model are more important than any real-world numbers. This is the fiscal policy version of the Wizard of Oz, and we’re supposed to ignore reality just as Dorothy and friends were supposed to ignore the man behind the curtain.
To be fair, there is nothing inherently wrong with CBO’s methodology. Economic analysis frequently requires people to make assumptions about how the world would behave with or without a certain policy. So the real question is whether Keynesian economics makes sense from a theoretical perspective, whether there is any supporting evidence, and whether there are more compelling alternatives. Click the links and decide for yourself.
An Easy Target: Mocking the Stimulus
Writing for The Hill, I explain why Keynesian-style stimulus does not work. In addition, I note that the so-called stimulus was just an excuse for pork-barrel spending. But my concluding point, excerpted below, is that the White House goofed politically by making specific claims about the good things that ostensibly would happen by increasing the burden of government spending:
The only surprise was that the White House was foolish enough to make specific claims of the good results that supposedly would flow from all the pork-barrel spending. In part, this is the absurd notion of claiming 600,000-plus “jobs saved or created” when total employment actually has fallen by more than 3 million. But the bigger mistake was claiming that the faux stimulus would keep the unemployment rate from rising above 8 percent and that failure to squander $787 billion would cause the jobless rate to climb to 9 percent. The politicians got their wish, yet now the unemployment rate is above 10 percent. Brilliant.
Filed under: Government and Politics; Tax and Budget Policy
Republicans Just as Guilty of Flawed Keynesian Thinking
The core of Keynesian economic policy is that the government must come in and replace reductions in private sector demand with public sector demand, therefore bringing overall demand back to its previous level. One of the many flaws in this thinking is in assuming that the previous level of demand was “correct” and getting us back to that level is the appropriate policy response.
Take the example of the housing market and the government response. The primary response of Republicans in Washington has been to offer tax credits and other incentives to replace the drop in demand for housing. Witness Senator Johnny Isakson’s recent comments on why we need to extend the $8,000 homebuyer tax credit: “If you take that kind of business out of what’s already a very weak housing market, you do nothing but protract and extend the recession.”
This analysis could not be more wrong. The tax credit largely acts to keep housing prices from falling further. However, that is how markets are supposed to clear in an environment of excess supply. If there’s too much housing, the way to address that is to allow housing prices to fall, which attracts buyers back into the market.
We should also recognize that the tax credit does not help the buyer, it helps the seller, by allowing the seller to charge that much more for the price of the home.
Soaring Sales for “Road to Serfdom”
Cato’s new staff writer, Aaron Powell, told me he had recently seen two people on the Washington Metro reading The Road to Serfdom by F. A. Hayek. That prompted me to check the sales figures for Road to Serfdom at Nielsen’s Bookscan. And whattaya know? Sales have increased this year at an even faster pace than sales of Atlas Shrugged. (Atlas sells 10 times as many copies, but the percentage increase over last year is less.)
So far this year the most popular edition of Road to Serfdom has sold 11,000 copies. That compares with 3,000 copies at the same point last year. That’s a 263 percent increase for those of you keeping score at home.
Why? Well, no doubt huge new government spending programs and attempts to massively expand the welfare state send people looking for classic literature that makes the case for liberty and limited government. But what the Marxists call the “objective conditions” can always use a bit of help. And indeed, just as I found in investigating the sales bump for Atlas Shrugged, it looks like an op-ed in the Wall Street Journal was instrumental in boosting the sales of The Road to Serfdom.
On February 4, former House Majority Leader Dick Armey, now chairman of Freedomworks, published an op-ed in the Journal titled “Washington Could Use Less Keynes and More Hayek.” Sales of Road to Serfdom, which were in the low hundreds each week since the beginning of 2009, more than doubled over the next four weeks. It seems likely that Armey’s op-ed caused the new interest.
Armey didn’t actually mention The Road to Serfdom — he just talked about Hayek and his ideas generally — but when you go looking for Hayek, you’re going to find his most popular book. So maybe we could attribute the sales bump instead to David Henderson’s review of The Road to Serfdom — titled “Still Relevant–Perhaps More So” — in the Spring issue of Regulation. But the Wall Street Journal does have a larger circulation.
Update: This item has been edited to remove proprietary information.
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