A Bold Prediction

The CBO is out with its quarterly estimate of the effect of the stimulus bill on unemployment. The usual suspects are heralding the CBO’s findings — that the stimulus raised the GDP by between 1.7 percent and 4.2 percent; lowered the unemployment rate by between 0.7 percentage points and 1.5 percentage points; increased the number of people employed by between 1.2 million and 2.8 million; and increased the number of full-time-equivalent jobs by 1.8 million to 4.1 million compared with what those amounts would have been otherwise — as evidence that the stimulus has been a smashing success.

Allow me to make a bold prediction: The CBO’s next quarterly report on the stimulus will come to roughly the same conclusions, regardless of what we actually observe with regard to GDP, the unemployment rate, or the number of people employed. Let me be even bolder: All of the CBO’s quarterly reports from now until the law’s expiration will reach the same conclusions, because the CBO’s models beg the question: They assume that certain inputs in the form of government spending have certain predictable effects on GDP and employment that are in line with the Keynesian view that fiscal stimulus creates jobs. Every quarter, the CBO just re-runs its models, regardless of what we are observing in the real world. The agency is repeating itself. Brian Riedl explained this very clearly last time:

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.

Critics of the Keynesian view of things have disputed the CBO’s multipliers from the beginning, and our arguments have not changed (e.g. if every dollar of government spending ultimately raises the GDP by the amount CBO says it does, then we should just let the government spend all the money). Commentators who are treating the latest CBO report as new empirical evidence that the stimulus did great things for the economy either don’t know what they’re talking about or else they are being very hackish.