Feed on

In the second quarter of this year, US nominal GDP crossed the $15 trillion mark. According to Recovery.gov, the individuals who work for the federal government have spent 93% of the dedicated stimulus funds from the 2009 American Recovery and Reinvestment Act. This means $731.9 billion has been spent.

According to the macroeconomists at the time of the stimulus’ passage, we were being sold on a government stimulus multiplier on the order of 1.6 (wasn’t it 1.57, what precision!). What this meant was that if government spending was increased permanently by 1%, the GDP would increase by 1.6% over what it otherwise would have been.

OK, so there are lots of caveats to be made, but let’s do a poor man’s back-of-the-envelope on this.* If we spent $731.9 billion in stimulus funds already (and is there much doubt that the ratchet is permanent?) then the multiplier of 1.6 indicates that today’s GDP is $1.17 trillion larger today than it would have been. Maybe. But consider how much this is. It is 7.5% of GDP. It means that GDP, instead of being what it is today, would be at levels that last prevailed sometime in the second quarter of 2007. It could be that’s right, but I don’t see a lot of people making that claim very loudly. And I have not gone back yet to look at the employment estimates, but I think they were predicting 3 or 4 million jobs saved or created. Could be, no way to tell of course. But does it sound right to you? Instead of the current 139 million people working we’d have only 136 or 135 million.  Could be? But that means 17.9 million people would be unemployed instead of 13.9 million. But that means measured unemployment would not be 9.1% but if all those unemployed were still in the labor force, an unemployment rate of 11.7% would have prevailed. Could be, who knows?

Of course, stimulus proponents will tell us that “you are ignoring the destimulating impacts of what happened at the state and local levels!” To which I reply, “then your models and methodology are garbage.” Are they serious when they make such claims? Was it so knowable that we needed fiscal stimulus of that size at the federal level and so unknowable what was going on at the state level? And if so, then why so much confidence at the outset in those multiplier figures? They were very confidently paraded around as I recall. More important, suppose these brilliant economists and policymakers DID have an understanding of what was happening at the state and local level. Wouldn’t their subsequent promotion of a 1.6 multiplier be an outright lie?

Or maybe we actually did get a multiplier of 1.6. There’s no way to know of course. No way, well, maybe a way, but no one is in the mood for an Intro Econ lecture. As I surmise it then, either the stimulus hawks were completely right, over-confident or outright liars. But it couldn’t be the latter. Of course not. I think only Republicans are liars.

(*) This is worth its own blog post. I cannot stress enough the importance of being able to do back-of-the-envelope calculations, they might be many folks’ only defense from charlatans or undue pessimists or optimists.

4 Responses to “Multiplying Mendacity”

  1. Rod says:

    I always liked that “saved or created” phrase. A great place for it would be in a sermon in church: “God and Jesus saved or created 500 billion souls last year.”

    It must have been some of both. Certainly the main idea was to make sure that nobody lost a government job as long as the governors of all 57 states did not want to lay anyone off. And what better excuse to add bodies to the EPA and banking regulatory agencies than to say that unless government is increased from 20 percent of GDP to 25 percent of GDP, Bush would get away with causing another Great Depression.

    Actually, I think the blame goes to that great Chicago law firm Dewey, Screwem and Howe.

  2. Harry says:

    Yeah, I read that argument around the first week in July, the COEA citing “mainstream” economists for the multiplier. It’s like saying the batter went two for five based on the team’s expected batting average, according to predictions of mainstream sports writers.

  3. Harry says:

    The stimulus hawks would be glad to argue a priori that all Republicans are liars. A posteriori, I would agree that some Republicans have lied, and not all stimulus hawks lie about the multiplier, because Plato would aver that no man can do wrong voluntarily. Aristotle would say they are mistaken.

    You get a chance to use your fallacy chart in class, WC!

  4. Speedmaster says:

    On “back of the envelope” calculations, I’m a big proponent if a poor practitioner.

    One of my favorite computer science books (Programming Pearls) introduced me to the method as a habit.

Leave a Reply