In my new Reason column this month I tackle the issue of models that economists use to predict the impact of a policy on job creation.
Economists of all persuasions have proven to be really bad at predicting the future, especially when it comes to jobs. Take the stimulus. Forecasters at the White House and the Congressional Budget Office (CBO) predicted the stimulus package would create more than 3 million jobs. And in August 2010, the CBO estimated that the stimulus had indeed created between 1.4 million and 3.6 million extra jobs, thrilling supporters of economic intervention. But unemployment stubbornly remained around 10 percent.
What was wrong with the CBO’s numbers? “When the upper limit of your estimate is almost three times the lower limit, you know it is not a very precise estimate,” the George Mason University economist Russ Roberts pointed out in testimony to the House Subcommittee on Regulatory Affairs, Stimulus Oversight, and Government Spending in February.
The truth is that there is no way to know the real number of jobs “created or saved” by the stimulus. For that, the CBO would have had to collect data on output and employment while holding other factors constant. But the CBO didn’t do that because that’s different from its job of “scoring” the possible results of proposed legislation. As the CBO explained in a November 2009 report, “Isolating the effects would require knowing what path the economy would have taken in the absence of the law. Because that path cannot be observed, the new data add only limited information about [the law’s] impact.” In other words, CBO number crunchers gave it their best guess before the stimulus and arrived at their subsequent numbers by applying their original prediction model. If the model is wrong, so are the numbers.
In this particular case, I am picking on the assumptions made by pro-stimulus advocates, but the same criticism applies to models like the one used by Chairman Ryan in a recent Wall Street Journal op-ed about his plan:
A study just released by the Heritage Center for Data Analysis projects that The Path to Prosperity will help create nearly one million new private-sector jobs next year, bring the unemployment rate down to 4% by 2015, and result in 2.5 million additional private-sector jobs in the last year of the decade. It spurs economic growth, with $1.5 trillion in additional real GDP over the decade. According to Heritage’s analysis, it would result in $1.1 trillion in higher wages and an average of $1,000 in additional family income each year.
The truth is that we can’t know anything that precisely.
The whole article is here.