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The Report on Stimulus CBO Wishes Would Go Away

Posted By J.D. Foster, Ph.D. On August 26, 2010 @ 9:42 am In Economics | Comments Disabled

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Pity the poor Congressional Budget Office (CBO) Director. Congress passes and the President signs the most massive fiscal stimulus program in history, spending more money on Keynesian stimulus than has been spent so far on the Iraq war [2]. But, unlike the Iraq war, the stimulus has been a complete bust.

Rather than launch a recovery, the stimulus managed only to launch a jump in the national debt. The economy enjoyed a mild bump late in 2009 as businesses rebuilt their inventories—a development completely unrelated to the stimulus—and then slid back to anemic growth in the second quarter and now appears to have stalled out entirely.

As part of the stimulus legislation, Congress mandated CBO report regularly [3] on how well the stimulus is doing. Money spent, economy faltering, Congress wants happy news about their stimulus, and in response all CBO can do is continue to run their antiquated models telling us that down is up and slow is fast.

In the latest report, CBO’s models indicate that employment is higher by between 1.4 and 3.3 million jobs thanks to the stimulus. In contrast, the unemployment rate hovers near 10 percent and would be much higher but for the millions of workers who’ve simply given up and left the workforce. Faced with such a contradiction between its economic models and the facts, what’s a CBO Director to do?

Rely on wrongheaded models, release fluff reports, keep congressional leaders off his back, and hope things get better.

Or face the facts, which are there for all to see: The stimulus failed because it had to. Keynesian stimulus can only rearrange demand in an economy while infusing it with new uncertainties. Growth happens only when business see real reasons to expand, reasons government spending cannot provide on net—a lesson the current ruling class in Washington fails to understand.

It’s not that stimulus per se was doomed to fail, but the Keynesian type of stimulus Obama pressed Congress to pass was doomed to fail. Obama placed his bet and now the country gets to pay it off in higher debt and more joblessness. It would help if CBO could acknowledge as much and thus participate in the process of changing course.


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URL to article: http://blog.heritage.org/2010/08/26/the-report-on-stimulus-cbo-wishes-would-go-away/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/cbo_logo.jpg

[2] spent so far on the Iraq war: http://www.washingtonexaminer.com/opinion/blogs/beltway-confidential/Little-known-fact-Obamas-failed-stimulus-program-cost-more-than-the-Iraq-war-101302919.html

[3] CBO report regularly: http://www.cbo.gov/ftpdocs/117xx/doc11706/08-24-ARRA.pdf

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