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CBO Says Stimulus Is Working Because We Predicted It Would

Posted By Brian Riedl On December 1, 2009 @ 6:18 pm In Ongoing Priorities | Comments Disabled

The Congressional Budget Office today released a report [1] asserting that the stimulus succeeded in creating growth and jobs. If this seems completely detached from reality, it’s because CBO did not actually analyze the performance of the economy — including the rapid increase in the unemployment rate since the stimulus was enacted. They simply took their economic model that predicted last January the stimulus would work, re-plugged in the bill’s provisions, and (surprise!) got the same result. CBO is effectively saying the evidence the stimulus worked is that they predicted it would work. It’s like a weather forecaster standing in the pouring rain and asserting that its currently sunny, because his computer model had predicted sun.

The report’s other problem is its nonsensical Keynesian economics. The CBO asserts that $200 billion in deficit-spending from the stimulus added (a middle estimate of) 2.2 percent to economic growth. But if deficits equal stimulus, then the entire $1 trillion in additional 2009 deficits over 2008 should be counted. And CBO’s assertion that $200 billion new deficit spending adds 2.2 percent to GDP means the full $1 trillion in new deficits should have added 11 percent to the GDP. Yet the economy shrank by 2.3 percent. Are we to believe that without the new deficit-spending, the economy would have contracted by 13.3 percent, as CBO’s analysis implies? Surely it would be difficult finding any credible economist who would argue this. Yet it is what the CBO’s economic logic would suggest.

At some point, after so many failed experiments these economic assumptions need to be replaced by the reality that governments have not been able to spend themselves out of recession.

This is cross posted from National Review’s The Corner, found here [2].

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URL to article: http://blog.heritage.org/2009/12/01/cbo-says-stimulus-is-working-because-we-predicted-it-would/

URLs in this post:

[1] today released a report: http://www.cbo.gov/ftpdocs/106xx/doc10682/11-30-ARRA.pdf

[2] found here: http://corner.nationalreview.com/post/?q=MjNjYzBmYTQ3ZjYyZDgzZTIxMzYwYzhlYjY1ZDEwNWE

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