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  • Economic Impact of Stimulus Spending: A Response to Menzie Chinn

    At Econbrowser, Dr. Menzie Chinn provides a succinct summary of my critique of CEA’s “Economic Impact of the Stimulus” report when he writes, “…these implied increments to growth rates do not jibe with the inferences drawn by Dr. Campbell — that the impact on GDP is much smaller than CEA asserts when using forecasts from the other agencies and firms.” (italics mine).

    My critique was that the CEA’s method for estimating the economic impact of the American Recovery and Reinvestment Act (ARRA) cannot be used to make a meaningful inference about the economic impact of ARRA quantitatively (or qualitatively).

    The CEA admits, as does Dr. Chinn, that numerous other events and actions were taking place that could explain the difference between the forecast and actual data. The economic analysis undertaken by the CEA either needed to use econometric tools to separate out and isolate the ARRA effect in the difference between the forecast and actual or they needed to run an impulse response of ARRA on their VAR model (a counterfactual analysis). That is, if they were going to use a VAR approach to study the impact of ARRA they needed to establish the baseline and then introduce ARRA to that same VAR model. For example, Christine Romer and David Romer used such an approach in their paper “The Macroeconomic Effects Of Tax Changes: Estimates Based On A New Measure Of Fiscal Shocks”.

    My point is simple and hardly “difficult to understand”: the Administration approach did not, in fact, estimate the impact of ARRA.

    The CEA just subtracted actual quarterly results for 2009 from the forecasted quarterly results. That’s a bad analytical move for at least two reasons: (1) Any number of things could explain the difference between a forecast and actual results. It is the job of the economist to separate out these effects in a statistically meaningful way. (2) The fact that using different forecasts provides different quantitative results shows that this methodology is inadequate for estimating the impact of ARRA.

    Dr. Chinn’s criticism of picking forecasts before the stimulus was enacted is moot since I am not trying to show the impact of ARRA but rather the inadequacy of simply producing a forecast and subtracting the difference. However, the choice of forecast was intentional. If the forecast was not made before the stimulus bill passed, then the forecast would have included the impact of the stimulus and thus could not be used as a “counterfactual” of what would have happened without the stimulus.

    Posted in Economics [slideshow_deploy]

    7 Responses to Economic Impact of Stimulus Spending: A Response to Menzie Chinn

    1. Pingback: The Heritage Foundation Confuses Me | Bear Market Investments

    2. Tucson, AZ says:

      The Heritage editorial board should be fired!!! Never , I say again, NEVER publish any article that does not clearly SPELL OUT EVERY ACRONYM used anywhere in the article!!!!!

    3. James L. Campbell (T says:

      Occassionally when making an economic analyses one should rely upon specific predictions against the economic facts. The President of the United States, undoubtedly relying upon the advice of his Council of Economic Advisors, predicted that in 2009 and 2010 jobs would be created thereby inferring that more people would be employed and that has not happened, fewer are working today than when he made the projection.

      We now have an argument being made that the predicted decrease in GDP, and presumptively total employed did not occur and therefor the economic recovery package worked! That is not what the President said he said that the economic recovery package would result in increased numbers at work using, I thought, as a baseline employment numbers compared with where they stood as he spoke the words.


    4. Drew Page, IL says:

      I don't see many jobs listed in the "Help Wanted" section of the paper and I believe that overall, unemployment averages 10% or more. I fear that any reduction in that 10% figure is due to people who have exhausted their unemployment comp benefits and therefore no longer identified as unemployed.

      I understand that not all of the Stimulus money has been spent. My vote would be to take any unused TARP and Stimulus maney, along with any of the bailout loans that have been repaid to pay down the national debt.

    5. Ben C. Ann Arbor, MI says:

      The whole problem with the "Recovery Act" is that it has not created wealth. Here in Ann Arbor we have a brand new parking lot on the corner of Plymouth Rd and US 23. While it is nice to have and a few people had some income while it was being built what is it worth? If the "goverment" decided to sell it who would buy it? "Make work" jobs do not generate long term wealth and economists now believe that FDR's programs lenghtened the Depression by at least seven years (despite the posting from a liberal yesterday stating that it is a proven method). If people want the middle class to prosper then get government out of the way. Socialism didn't make the Soviet Union wealthy. Their form of government didn't help anyone other than "the mob" and those at the top of their food chain. China has 60 million peple in pretty good shape and the remainder of their 1.3 billion in poverty. Yes, and their system really works well for those at the top too. Get the picture?

    6. Lynn Bryant DeSpain says:

      It seems to me, that creating an American Economic Stimulus Program, to create jobs in America, by imposing a vast debt on future Americans is not best intentioned when Electrical Wind turbines are built in China and other Countries and the jobs are created here to install them.

      It would be best to build all of the procuts right here in America, creating jobs, and jobs for the materials, and jobs for the food and clothes, and other services, especially since it is an American Debt paying for it all anyway!

      Not one dime of the stimulus money should ever be allowed to leave this Nation, for any reason!

    7. Dennis Social Circle says:

      I do not understand how anyone can think the economic problems we face can be solve by saddling the future generations with a huge debt. If borrowing money was the answer then none of us would owe anything.We need to look at the carter days, huge debt, high interest and a lack of jobs. Regan solve the problem when taxes were lowered, and jobs were created. The next generation of dems raised taxes, personal, and busines, then claimed to have a balanced budget. Well we now see what happened, jobs went to foreign countries, business took their companies to places where they could survive, lower wages and tax. The unions push for and got higher wages, benefits and less work for the emplyees. Look what happened to EASTER AIRLINES, it is gone, look at GM, Chrysler, Ford, two of the big three have gone under, yet obama and the dems keep shoving money to them, the unions keep trying to get more and more. This can not keep going and this country survive as we know and love it to be. We the people have to go back to work, sure you may not get $25.00 per hour, but you have to start someplace.

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