Be afraid; be very afraid.
From “‘Created or saved’ doesn’t add up”, by Joseph Lawler:
…[t]he “created or saved” numbers are meaningless. The administration purposefully devised the metric to be nebulous. Without a counterfactual, showing the trend of unemployment in the absence of the stimulus, it is impossible to know how many jobs the stimulus saved.
But this is completely counter to what I learned in economics, and how, for instance, the CBO conducts analysis. I assume Mr. Lawler doesn’t dispute the impartiality of the CBO (but who knows?). Here’s the way real macroeconomists conduct analysis:
As the President has discussed, analysis done within the Administration has shown how his tax cuts have substantially offset the series of adverse shocks that have been buffeting the economy. Simulations of a conventional macroeconomic model show that, without the tax cuts, the level of real GDP would have been about 2 percent lower in the middle of 2003. About 1.5 million fewer people would have jobs today. The job market is not what we would like it to be right now, but it would have been worse without the Administration’s actions.
One can view the short-run effects of these tax cuts from a classic Keynesian perspective. The tax cuts let people keep more of the money they earned. This supported consumption and thus helped maintain the aggregate demand for goods and services. There is nothing novel about this. It is very conventional short-run stabilization policy: You can find it in all of the leading textbooks.
So let us return to how the Congressional Budget Office (CBO) conducted analysis. In their February analysis, they presented this set of results, based on a range of multipliers in the literature.
Table 1: from CBO, Estimated Macroeconomic Impacts of H.R. 1 as Passed by the House and by the Senate, February 11, 2009.
So GDP is estimated to be between 1.4 to 3.8 percentage points (ppts) higher than baseline in 2009Q4, due to the stimulus bill. The midpoint of this range is 2.6 ppts. Relatedly, the range of employment gain relative to baseline is 0.8 to 2.3 million; the midpoint of this range is 1.55 million.
Interestingly, taking the CEA’s model based approach (Table 2, Joint Economic Committee testimony of 22 October), and assuming the same incremental growth rate in 09Q4 as in 09Q3, the implied deviation from baseline is 2.56 ppts, or right in the midpoint of the CBO’s range.
Now using the error correction model that I estimated in last Tuesday’s post (where the cointegrating relationship between log GDP and log nonfarm payroll employment is 0.37), I find the range of increased employment relative to baseline is between 0.68 and 1.84 million, slightly lower than the CBO range of 0.8 and 2.3 million. The estimated employment impact is 1.26 million, using the midpoint of the CBO range for impact on GDP.
I know counterfactuals and math are hard to fit on a bumper sticker. But one would hope that in an 800-plus word essay on economics (even if in Politico), some economic content could be included.
By the way, Jeff Frankel debunks a similar misapprehension in National Journal.