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  • CBO Report Was Pre-Ordained to Show the Stimulus Succeeded

    Congressional Budget Office

    The Congressional Budget Office (CBO) has produced a new report estimating that the $862 billion stimulus has thus far saved or created 1.5 million jobs.

    Yet the 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.

    Logicians call this the begging-the-question fallacy. Mathematicians call it assuming what you are trying to prove.

    The CBO model started by automatically assuming that government spending increases GDP by pre-set multipliers, such as:

    • Every $1 of government spending that directly purchases goods and services ultimately raises the GDP by $1.75;
    • Every $1 of government spending sent to state and local governments for infrastructure ultimately raises GDP by $1.75;
    • Every $1 of government spending sent to state and local governments for non-infrastructure spending ultimately raises GDP by $1.25; and
    • Every $1 of government spending sent to an individual as a transfer payment ultimately raises GDP by $1.45.

    (note that all CBO figures in this post represent the midpoint between their high and low estimates)

    Then CBO plugged the stimulus provisions into the multipliers above, came up with a total increase in gross domestic product (GDP) of 2.6 percent, and then converted that added GDP into 1.5 million jobs.

    The problem here is obvious. Once CBO decided to assume that every dollar of government spending increased GDP by the multipliers above, its conclusion that the stimulus saved jobs was pre-ordained. The economy could have lost 10 million jobs and the model still would have said that without the stimulus it would have lost 11.5 million jobs.

    The debate over the efficacy of Keynesian stimulus is essentially a debate over the correct multipliers. Some believe the multipliers are high, others believe they are as low as zero (or even negative). Testing the stimulus requires testing the multipliers. Yet by simply assuming large multipliers, CBO effectively pre-ordained its conclusion that the stimulus worked, regardless of what actually happened in the economy.

    Cross-posted at National Review’s The Corner.

    Posted in Economics [slideshow_deploy]

    8 Responses to CBO Report Was Pre-Ordained to Show the Stimulus Succeeded

    1. John, Rhode Island says:

      Why am I not surprised that the jobs "saved or created' number was essentially faked.

      CBO should come out tomorrow and say that they based their numbers on flawed economic models, or at least on economic models whose validity is questionable.

    2. Tim Az says:

      Mao-Bama pimping the CBO since 2009.

    3. Matt - Dallas, Tx says:

      The numbers were flaunted as reliable and perpetuated by the media. I have not seen anything in the news suggesting the CBO model is "questionable" for the success of the stimulus. It's obvious now that it hasn't worked. Are we going to have to live the legislation and laws for 5-10 years before we decide what sounded like a bad idea actually is a bad idea?

      How are we suppose to fight this deceit and manipulation?

    4. Brad, Detroit, MI says:

      Please stop calling it a Stimulus. It is pronounced – "STIMUSELESS".

      One prime example of typical government waste – When you allocate $5 Billion to weatherize homes and even if you use the Government's own numbers of completed and planned homes for 2009 and 2010 – it equates to $13,000 per house. Are you kidding me? This Cash for Caulkers worked almost as well as the Cash for Clunkers program (at a cost to the taxpayer of $24,500 per incremental vehicle sold). What a joke.

    5. Dennis Hulse, Palmer says:

      to Matt of Dallas: Relax mate, the mid term elections will sort things out and chasing that will also be Obama's "legitimacy" crisis, an earlier 'trick' against the Constitution and American people. The new Haiwaian Law proposal is a "rabbit out of the hat" trick that just makes things clearer – Obama is not America's saviour, quite the contrary. …..spectator from down under.

    6. Pingback: CBO Report Was Pre-Ordained to Show the Stimulus Succeeded | The Foundry: Conservative Policy News. « Cowgirlfromhell's Blog

    7. Mark, Spokane WA says:

      Mr. Riedl, I'm afraid that you have no legitimate basis for criticizing the CBO. To do this sort of analysis, you have to make some assumption about the values of multipliers. The CBO used reasonable, widely-accepted values. The source you link to for "high" multiplier estimates is in fact Mark Zandi, a conservative economist (he was one of Senator McCain's top economists in 2008).

      As for your notion that there is a legitimate argument for multiplier values of zero, it takes a lot of chutzpah on your part to support your claim by linking to yourself (hint: next time, save yourself the trouble and just say "this is true because I say so"). There is in fact no serious economic argument for a multiplier value of zero in any normal circumstance. Just last week, Robert Barro, in a WSJ op-ed, opined that the spending multiplier might be as low as 0.6. Barro, as the chief advocate of what is known as "Ricardian equivalence," represents a very extreme position in the debate over the effectiveness of fiscal policy. That being the case, his estimate of the multiplier value effectively constitutes a lower bound for even semi-reasonable debate about multipliers. When a non-economist tries to claim that "multipliers may be zero, because I say so," he invites others to refuse to take him seriously.

      I should add that, in the "backgrounder" you link to, you further damage your already wounded credibility. You assert that "During the 1930s, New Deal lawmakers doubled federal spending–yet unemployment remained above 20 percent until World War II." This claim is simply untrue. In fact, the stimulus from the New Deal, combined with FDR's departure from the gold standard, brought unemployment down from 25% in 1933 to around 11% in 1937. It rose after 1937–but only to about 14%–largely because FDR gave in to the blandishments of the Brian Riedls of the 1930s and cut back sharply on the stimulus during his second term. If you are going to invoke the Great Depression to make your arguments, it would be wise to get the facts straight before doing so.

    8. Pingback: CBO Admits that 1.5 Million ‘Stimulus Jobs’ Estimate Ignored Deepening Recession, Misspent Funds – The Foundry « HOME – Other Right Links and Posts – Remember In November!

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